7 Things to Know Before You Buy a Business
Buy a Business
Here are 7 things to know before you buy a business.
Buy a Business? Seven Tips to Follow:
Pick the right industry
Know what you want
Do in-depth research
Make sure you buy the assets
Prepare to make tough staffing decisions
Always get seller indemnity
Check all prepaid expenses
Did you know that around half of all businesses will have failed by their fifth year?
With this starting period being the crucial years for a company, it makes sense to buy one that is already running. But do you know how to find a purchase a business successfully?
There are many different facets to consider, from how to check if you are legally covered to managing new staff. Read on as we give our seven essential tips to know when you buy a business.
1. Pick the Right Industry
It is important that you buy a business in an industry you know, for a number of reasons. Firstly, you need hands-on knowledge of how that business works from the ground up. No one likes a business owner without experience.
Secondly, knowing the industry means knowing the state it is in. Is the market in decline, or is it set for a huge boom period? Without knowing this, you could buy a business that is already doomed to failure.
Start by making sure you have worked in the industry. Take six months out to go and work on the factory floor or make calls in the office. This will give you a much better understanding of how the whole place operates.
2. Know What You Want
When you take your first steps into acquisition entrepreneurship, goals are going to be at the center of everything you do. People who take over businesses need to set goals for everything from customer service standards to profit. Without them, it is impossible to measure the success and growth of the business.
What many people fail to address are their own personal goals. When you buy a company, other than increasing its turnover, what do you actually want from it?
Some people will go into the business with a goal to sell it later down the line for increased profit. Others may be going into it for life and may plan to pass it on to their children. Knowing what you want out of the venture makes it easier when setting the short, medium, and long-term goals of the business.
3. Do In-Depth Research
Once you have seen a potential business, then you need to do your research. The internet is the first place to begin your business valuation. Delve deep into the company's history, its financial records, and any news articles related to it.
Once this is done, begin to branch out. Do the same for its main competitors. Look at others in the chosen sector, or a geographical region if it is a brick and mortar business.
4. Make Sure You Buy the Assets
When a corporation or LLC decides to sell a business, you need to make sure you are not just buying stock. It can work out much better if you offer to buy the assets instead. From here, form a separate company that would act as the buyer.
The reason for this is twofold. First, if the business owes money, is in debt, or is being sued, then you are no longer liable, as you are not the business owner.
In addition, you will get better tax deductions on the assets. They will be judged by the price you paid for them, not the price the prior owner paid for many years before.
5. Prepare to Make Tough Staffing Decisions
When you take over a new business, it is natural that you'll want to do some things differently. Even if the previous business model worked, you will have ways of improving and adapting. Inevitably, this means that some people will have to go.
As the business models change, certain people or departments will become redundant. Unless you are willing to spend lots of time and money retraining them for new roles elsewhere, then they are no longer needed. Even if you do this, they may not be as interested in a different role.
Be honest with people about the reason for the dismissal. Give them fair severance packages and thank them for their service.
6. Always Get Seller Indemnity
From the business valuation to the period of due diligence, you will have gone through the company with a fine toothcomb.
However, you can always miss something. If that is something that could lead to the company being sued down the line, you'll take the wrap.
Indemnity can be placed as a clause in the contract. It states that if any lawsuits occur in the future as a result of something that was done before you took over, the previous owner will defend the case, paying all fees and judgments. They may also want an indemnity clause for anything that you may do after the closing takes place.
7. Check All Prepaid Expenses
Before buying, check how many prepaid expenses are in place.
For example, the company may have annual software leases or in-place advertising that costs thousands of dollars. You don't want to find out about this midway through your first year without having included it in your financial projections.
In addition, do not forget to check any leases on offices, shops, and warehousing. Make sure this will be carried on when you take over the business. Check if there are any clauses or stipulations, such as whether the rental price is fixed or may soon be facing a raise.
Want to Buy a Business Near Me? Get Assistance
When you buy a business, it pays to get assistance. There are many sites online that can match you with potential sellers and ensure a smooth handover.
Your first stop should be BizNexus. Set your targets, get matched with a business then connect with potential sales quickly.
Click here to sign up and let us help find your next opportunity starting today!
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