Thinking about buying a business? Make sure you get what you pay for!
So you've decided to take the leap and buy an existing business?
How do you make sure it's the right business for achieving your goals; that you are paying a fair price for it and you get what you pay for.
Before you dig too deep into the details of the new business, stop and make sure that buying a business is actually the right thing to do ie how does it fit into your strategy to achieve your goals? Then work out if it is better to set one up from scratch rather than buying someone elses! If you are sure that buying an existing business is the right strategy for you (eg to increase market share, get access to a new geographical area, buying a niche, getting rid of a competitor etc) and it's the right time to buy then you can proceed to review this company in detail to confirm that it is actually the right business for you to buy.
The first step is to work out exactly what you are buying. Here, we are actually talking about whether for example, your company is going to buy the business assets out of the current business owner's company or whether you are going to buy the shares of that company from the current owner. There is a very important difference – if you buy the business assets then it is usually pretty clear what you are buying eg goodwill, stock, equipment etc. If you buy the shares in their company then you become responsible for the whole company including all of its assets but also all of its debts and liabilities. You need to make sure there are no undisclosed liabilities such as supplier bills or warranty claims. But the advantage of buying the shares is that you don't have to change bank accounts, ABNs, customer/supplier contracts etc.
Once you've worked what's included and what's not, you can work out how much you are prepared to pay for the business. Price is not the same as value! The price is what you are prepared to pay while the value is very subjective. There are five common methods to value a business and it's important to work out which method is most appropriate for that type of business.
The next step is to work out how you are going to pay for the business as well as the necessary working capital to get you through the first few months. If you don't have enough cash for everything there are a variety of ways you can finance different components. It is very important to get the right type of finance for each component to minimise interest & fees and get it paid off as fast as possible.
If all that stacks up right then you get to dig a bit deeper to make sure everything is as you expect. Due diligence involves reviewing both the tangible assets like making sure the equipment is identified and in the right condition; as well as the paperwork like supplier, customer and employee contracts. You are trying to make sure you get what you paid for with no surprises!
At DFK Everalls we love helping clients find the right business at the right price so that they can achieve their goals." We are presenting a free Boardroom Briefing, at 5.30pm on Thursday 11th August to discuss all these issues in more detail.
To secure your place or for more information, visit dfkeveralls.com, call 6232 4588 or email firstname.lastname@example.org
OR, if you cant make it in person, why not login to our Webinar
Wednesday August 17th 12.30pm