What to Look for When Buying a Business

What To Look For When Buying A Business

Know Your Budget

Buying a business is going to require you to outlay some cash, but you don’t want to accidentally overspend. Before you do anything, have a clear understanding on what your budget is.

You can choose to use existing funds to buy a business, apply for finance, or seek an investor or partner. There are pros and cons for all these options, such as, you could leave yourself cash poor by buying outright, you could put your new business under strain by borrowing funds, and you would have to set parameters with a partner or investor.

The best option is to seek advice from your accountant or business advisor. If you don’t have either of these people available to you, then reach out to our team today and we’d be happy to provide you with practical advice about buying a business.

Find One You Like

Once you are clear on your budget, the next step in buying a business is obviously finding a business that you want to buy! There are plenty of places you can look, like TradeMe, a business broker, online groups or your own network.

When you discover a potential option, there are a number of things to think about:

• Is it something you can run yourself or will you need to employ staff?
• Do you have everything you need (or will it come with the sale) to operate successfully?
• Do you have prior knowledge or experience that can help you?
• Is it in a viable location?
• Will it be something you are happy to run long term, or
• Can you build it up to sell on for a profit?

If you’re comfortable with your answers, it’s time to move onto the next stage.

Market Research

Before you think about buying business and investing, you’ll want to do some market research. Conducting thorough research will help you understand if there is a demand for the products or services the business offers. There is no point in trying to sell something that people in your target location don’t need.

It is also helpful to check out how many competitors you will have and how they are performing. If the market is already saturated, you might find it hard to gain traction. However, if the products or services you intend to offer have a clear distinction or USP (Unique Selling Point), it will set you apart from the competition. Either way, it is important to know what you are up against.

Another thing to examine is whether or not there are potential growth opportunities. Could you expand the business, add a complementary product line, increase the available services, or even franchise the business down the track?

Finally, you want to research any potential constraints like the local economic conditions, and any regulatory or legal requirements that could impact the business.

Analyse The Financials

Before you can even think about buying a business, you need to know what financial state it’s currently in. You’ll want to ask to see their financial statements to find this information out. They may ask you to sign an NDA (non-disclosure agreement) before they release this to you.

Then analyse the financials of the business to evaluate its profitability, revenue trends, and cash flow. This will help you determine whether the business is a sound investment and whether its financial performance is likely to continue in the future.

If you aren’t sure what you are looking at when it comes to the numbers, seek advice from your accountant or a financial advisor.

Analyse The Operations

Once you’ve looked at the numbers, take the time to look at the practical side of the business too.

Evaluate the day-to-day operations, including staffing, inventory management, and customer service processes. This will help you identify any areas for improvement and potential risks.

It will also give you an idea of how much you will have to personally contribute to the operations to keep it running and if you are able to fit that workload into your current schedule.

Complete Legal Due Diligence

Now it’s time to look into the legalities. Conduct a thorough review of all legal documents related to the business, including contracts, leases, licenses, and permits. This will help you identify any potential legal issues that could impact the business.

If you aren’t too sure about how to read the legal documentation, then it is best to seek advice from a lawyer or business advisor who can give you advice and guidance on whether it is worth pursuing a purchase.

Consider The Tax

Paying tax is a reality of running a profitable business, so you want to know where you are at on the tax front.

Review the tax obligations of the business, including its income tax, GST, and payroll tax. Are there any outstanding amounts from previous tax periods? And will the business be profitable enough to meet your tax obligations immediately?

You should also consider any potential tax implications with the sale and purchase of the business.

Think About The Employees

Does the business already employ people? If so, you will want to review their employment contracts, benefits, and any issues that have arisen in the past or potential future issues.

You will probably have to take on the employees as your own in the first instance, so you’ll need to ensure there aren’t going to be any conflicts or too much resistance to a change in ownership. Also bear in mind your obligations as an employer, and any conditions of their contracts are being fulfilled.

Look At The Reputation

The final thing you need to look at is the reputation of the business. This consideration is less cut and dry than the others as it is all about perception.

Try your best to evaluate the reputation of the business and its brand in the market. This will help you understand how the business is perceived by customers, suppliers, and other stakeholders.

Seek Advice

Buying a business is a big decision, and it one you shouldn’t make alone. It’s always helpful to have someone that understands business and their financials to look over a proposition before you proceed with it.

They can objectively look at the facts and your own position to advise whether or not it’s a good investment for you to make. A Chartered Accountant is the perfect person to engage when buying a business as they can give you honest, practical and educated advice.

Here at Drumm Nevatt and Associates, we specialise in professional service with a personal touch for New Zealand businesses. Our team understands what a business needs to be successful, and we can use our expert knowledge and experience to ensure you make a considered decision when buying a business.

Chat with us today.