Buying an existing business is a common goal of entrepreneurs everywhere, but the process can be challenging. If mistakes are made along the way, the issues can plague the business for years to come. That’s why experts encourage potential business buyers to use caution and cover all their bases before signing on the bottom line. Here are a few elements a buyer should review before purchasing a business.
Why is the Business for Sale?
Just about every advisor has this question at the top of their list of questions buyers should ask. The seller’s motive impacts the value of a property and its potential in the future. While the seller’s answer to that question will generally be truthful, be aware there may be more than one motive for selling a property. For example, the seller may be retiring, but the retirement may be spurred by a negative market outlook or the need to invest additional funds in the business to keep it competitive. Buyers are encouraged to explore resources like those at businessbrokersaustin.com for more information. The reason for the sale will always impact a purchasing decision, as the seller’s motivation affects their willingness to negotiate the price or other aspects of a sale.
What are You Buying?
In most cases, buyers are too superficial when exploring a business opportunity. In other words, they look at the surface issues rather than digging deeper into the company, its attributes, and any liabilities. In most cases, the company’s assets and ongoing business potential have more value than the name alone. In other words, will the company be profitable in the future, or will extensive modifications be required to maintain or improve the business? Will the owner’s reputation impact your ability to maintain or increase sales? If so, can the issue be mitigated? When working with a broker, discuss all aspects of the purchase before making a final decision.
Is the Real Estate Valued Appropriately?
When real estate is involved, are the land and structures accurately described and valued? Appraisals will generally establish an accurate value, but a seller’s appraisal may not reflect factors essential to a buyer. Buyers are always encouraged to get their own appraisal if valuation questions arise. Remember, appraisers use a variety of strategies when evaluating a property, so take the time to ensure an appraiser is aware of your concerns before starting the project. Your business broker will assist with resolving any issues of this type.
Don’t Forget About Due Diligence
Far too many buyers get excited after finding the “perfect” business and neglect to do their due diligence. They review some basic data but don’t take the time to explore all the nuances of that information. This is where having a solid team of experts available is crucial. Your broker’s advice is always important, but financial and legal experts’ assistance is absolutely essential at this point. Your team will examine existing legal agreements, financial liabilities, patents, and property titles. All of those issues (and more) must be clear before closing the sale.
Explore Employee Issues
One element business buyers often overlook is the status of current employees. In some instances, a sales agreement will include stipulations related to retaining employees, but most won’t. If that’s the case, how likely is it that key employees will remain after a sale? If key staff members are lost, how difficult will replacing them be? In an ideal situation, agreements will be in place to guarantee key employees will remain, but that’s not always possible. Discuss this issue with your broker to see what steps might work to ensure essential employees are encouraged to remain after the sale.
Conversely, contracts might be in place that requires retaining employees that may not be needed. This is an entirely different issue. For example, if the company being acquired will be merged with another company, redundant staffing may be an issue. Determine when and if unneeded employees could be released. Here, legal and financial advice will be needed.
Handling the Change of Ownership
Most transfers flow smoothly with proper planning in place. However, that planning isn’t always as easy as it might seem. In many instances, the buyer won’t have the experience to step in and take over. That means the seller may need to stay on board for a while to help the buyer acclimate to the ownership role. If that’s not possible, the buyer may need to bring in someone else with experience to ensure the business operates efficiently. Key employees may also help with the transition, but that option isn’t always available.
Build Relationships with Suppliers
Another issue facing a new business owner is maintaining relationships with suppliers or selecting new ones. Choosing suitable suppliers will always be crucial, as having the correct supplies on hand when needed means the difference between the success and failure of a business. Today, supply chain issues are common, which means having reliable business partners has never been more critical.
Plan for the Future
When buying a business, focusing on the future is an aspect every purchaser should consider carefully. Will the business remain much the same, or will significant changes be needed to meet evolving market conditions? Equipment may need updating, new company vehicles often need to be replaced, and buildings may need renovations to accommodate the business’s requirements. Start planning for the future immediately when purchasing a business to ensure the funding and staff members are in place when needed. Being ready to adapt to evolving conditions leads to increased stability and profits.
Choose Your Allies Carefully
When purchasing a business, your team will provide the information and advice needed to enhance your chances of success. That means it makes sense to choose those team members carefully. A business broker is arguably the most important partner to have on your side when buying a business. However, having an accountant and attorney will also be necessary throughout the purchasing process. To get the advice needed when buying a business, contact a business broker today.