Taking over a business is less risky than starting one from scratch. Instead of estimates, you’ll have in real hand profit and loss records and a history of sales. Founders don’t just list their business for sale because they aren’t doing well – there are plenty of other reasons, such as moving on to other things Before you take over such a business, here are the main things you should consider.
What’s The Right Business For You?
It is not a choice you can make without thinking it through. Your lifestyle and livelihood are going to revolve around this business for many years.
While this decision is entirely yours to take, a few things you could think about to narrow down options are:
- Does location matter? Are you willing to move, or do you want it closer to home? Don’t forget to factor in taxes, labour costs, etc. that could change the bottom line in a different location.
- How big are you willing to go? Are you looking to own an enterprise or a family business? Are you willing to take on the stressful transition and higher purchase price of an enterprise in exchange for higher profits?
- What industry excites you or where does your expertise lie? Your business could be linked to your hobby.
- What kind of lifestyle changes are you willing to take on for your business? Think about the travel involved, unconventional hours or 9-5, etc.
What’s On The Market?
The best place to start your search for a suitable business on sale is not the Internet. You should first spread the word among your friends and acquaintances. Or is there a local business you love that’s willing to sell? If there’s a business you’ve been wanting to own, you could always find out if they are selling.
You can then take your search online. But you’ll have to be extra careful to avoid bad deals from your searches online.
If you can’t find any leads on your own, you could find a business broker to work with. Business brokers, like real estate agents, will vet businesses for you based on your requirements. They will also help negotiate the terms of the purchase. They charge you a small commission when you finalise and make a purchase.
Do Your Due Diligence
Once you’ve found a business and before you buy, you must put on your investigative hat so you know exactly what you’re getting into. Check the financial records carefully – an accountant could help you with the independent valuation as well. You’ll want to assess risks to decide if it’s a worthwhile investment, even if it looks good at a glance. Look at existing contracts, liabilities and assets, and profits. Having a CPA help you will ensure you’re buying at the right price.
Red flags to look out for when checking out vendors:
- pending litigation
- a bad image
- dropping sales prices just before selling the business to raise gross sales
A few other factors aren’t necessarily deal-breakers but they could be obstacles:
- owed staff entitlements
- old or inadequate equipment or premises
- a difficult landlord
Before you settle or enter into a binding contract, you can assert your right to a trial period. You must make sure the vendor:
- introduces you to the landlord, suppliers, or estate agents
- gives you the time you need to close the deal
- doesn’t give in to an offer too easily
- Doesn’t overhype the deal
Never leave anything to chance when you’re buying a business. You’re not just buying the assets and the operations, but also its liabilities.
How Will You Fund The Purchase?
Unless you have a financial backer or the money put by to buy a business, you’ll need funding.
Once you’ve identified an industrial business for sale and settled on a purchase price, you can turn to a few different avenues for funding:
- Venture capital or angel investors. You’d be partnering with a financial investor and sharing in the profits. The advantage is if the business fails, the burden of debt on an unprofitable business is not on you.
- Seller financing. If the vendor agrees, you can make payments over time to buy the business. You’ll be paying interest on the purchase price, but it’s the best option if the seller doesn’t need an upfront payment.
- Business loan. You could get a loan through a bank or an alternative lender. Your personal credit score will play a role in your eligibility for the loan you need. But lenders are more willing to lend for businesses with a known revenue history.
A financial advisor can help you figure out the right funding option for you.
Be Careful With The Sales Agreement
When drafting the sales agreement, you’ll want to work with a lawyer who is experienced with acquisitions. You’ll want to be very clear on the terms written down, so there are no ambiguities.
Go carefully over the contract of sale and see if you can add the following:
- a condition guaranteeing any representations made by the vendor – written and otherwise – are correct.
- a performance clause that specifies the minimum profits of the business over a certain period leading up to the settlement.
- a condition transferring important existing contracts to you.
- a restraint of trade clause that will restrict the vendor from operating a similar business near you for a fixed number of years.
If you can work out a payment plan that will let you pay in stages, it will be the best option. You can retain a part of the purchase price for a specified period and place it in a trust with an estate agent or solicitor.
Other Things To Consider
A few other things to keep in mind are:
- Is the vendor transferring the title of the premises to you? Does the seller have clear ownership of the premises?
- Are you taking on a business premises lease?
- Watch out for short leases, or ramped up lease prices in lieu of a reduced price for the business.
- Right after settlement, take care of the business name transfer and license transfers. You can do this yourself, with advice from the Australian Business Licence and Information Service (ABLIS.)
Buying a business is a big step in your life. Even if it’s a business with a proven track record, you’ll want to go in with clear goals and a vision. Look over the marketing strategies and cash flow. Do the strategies need refreshing?
The transition will involve a lot of hard work. But with the right connection and professionals to help you, you can begin to turn a good business into a great one in the future.