Business Buying – Doing your homework before you buy

Posted by Bizink on Nov 14, 2011 5:49:33 AM

Many people dream of buying a business and turning a small idea into a big success. The attractions are in making large profits, being your own boss, making your own decisions and employing other people to do your work and having time to think of other small ideas to grow… Buying an existing business gives you a kick-start in premises, plant, machinery, staff, plus brands, goodwill, marketing, databases – all assets that are attractive to a prospective buyer.

There is no doubt that investment in a business that works gives a better return than almost anything else available for soaking up your capital. There is no reason why a sensible approach and a bit of working capital should not result in business success. However… (and it’s quite an involved ‘however’) there is a lot of homework to do before you sign anything to do with a business or franchise purchase.

You may need to adopt a suspicious nature to dig and delve into a business on offer. You need to listen carefully to the agent to get a feel for why the business is for sale and you need to get some professional ‘diggers and delvers’ to make sure the business is valued correctly and that the financial statements are as they should be – that way you know what you are buying and that you are paying the right price for it. It’s the same as getting a building inspector to examine a house before you buy it or the ‘AA’ to do an inspection on that second hand car you may want to buy.

The first to engage would be an accountant or a valuer. Either way these professionals will give you their opinion of the value of all the assets – age and condition of plant, contracts, leases applicable, the suppliers and their terms, an opinion on the financial status of the business and the presented accounts (are they correct for one thing?), and an opinion on the financial status of clients. The value of these can be used to reassure you, or as a tool to negotiate the price down.

The reason to sell is a big factor – you need to feel this out – has the entire story been disclosed or are there important clues as to the health of the business that are being glossed over? Like buying a house with a building inspection that still turns out to be leaky; buying a business involves many intangibles that can’t be seen on the surface – take ‘goodwill’ for example, does it exist or are customers disgruntled and going elsewhere. You may be able to ask for testimonials and references for customers so you can check them out yourself. Location is another one – “yes we have lots of walk-in customers” – go and park in the street and see for yourself if lots of street trade is apparent – “yes we’ve got great sales figures” – get a Bizstats report to follow up the sales history – this will give you a rough guide to value as well.

If you are looking at a franchise the Franchise NZ website is the place to start. An extensive list of questions will prompt you to look in a variety of different areas for details as to the health of the franchise and the franchisor. Be careful to ensure that ongoing involvement with the franchisor is the experience of other franchisees as sometimes they disappear when you need their support.

A main part of any successful business exchange is the ability of the buyer to make the ongoing business work – what you pay for a business, as long as it’s reasonable and not inflated, is just the beginning - if you have your business plan in place and have done the groundwork and homework – if you have the management skills to make it work and employ the staff who believe in your dream then sign that contract and get started!

XO Accounting are Xero Platinum Partner Accountants based in Auckland
Contact us today to set up a free no obligations appointment to discuss how XO Accounting can help give your business the competitive edge.

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Topics: business, buying a business, due dilligence, financial, Firm News, report, xero, be your own boss, Blog, investment, valuation, value, xero accountant, accountant, franchise


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