So you would like to buy a business, but don’t know how to select a business to buy? One way to select a business is to examine the features of a business as well as your own characteristics to determine whether the business is an ideal target for you to acquire. Here are our 12 tips:
1. Location
Consider where the business is located. The business might be situated in a fabulous place where its customers reside, work or visit. Cafés, for example, are best suited where there is a large number of people to support them. Specialist doctors and surgeries are better located near hospitals. When you are looking at the location also consider whether there is parking or customers can easy access the business. While a business in a heavily populated area might be attractive, it might be difficult to reach if it is located on a main road with no parking or access for example. But note, for some businesses, such as an online business which do not carry stock, the location might be irrelevant.
2. Revenue and cash flow
A business that has products, services or other revenue strategies, such as subletting the premises it is leasing, is viable, as it indicates that it has assets from which to source an income. However, the nature of that revenue source should be analyzed to ensure the income will not only continue following completion of the transaction but there is a regular cash flow which will help cover the obligations of the business after completion of the transaction.
3. Profit
A business that generates profit is viable, as it illustrates that it’s receiving more income from its revenue sources than what’s required to operate the business. Excess income can be recorded as profit and used to invest in other areas or be distributed to owners as income. However, proper examination of the accounts should be made, given that sometimes certain amounts will not be included in the accounting records. If the owner has worked in the business for free, but if you require someone to operate the business after completion, this will reduce the profit recorded by the previous owner.
4. Asset rich
Acquiring a company or business that is asset rich, like owning property or plant and equipment, will enable you to leverage those assets, by either mortgaging the assets for a loan or selling the assets and using the cash.
5. Skills and strengths
A business that reflects your strengths, including your skills, interests, personal goals and objectives, or is in a sector that you understand, is an ideal target as might have an intuitive understanding on how to operate or direct the business and will likely be more successful compared to a business you are not interested in.
6. Complementary and positioning
A business that is complementary to any existing business that you might have, which fills any gaps in your current business and allows you to increase or change your market position is viable. A complementary business might be acquired to expand the customer list or to obtain products, services or software that enable the existing company to target alternative channels and customers. Sales can be increased by targeting similar customers and cross-selling to each company’s customer list, or by widening the range of services or products that are currently being provided.
7. Competitive
Acquiring a competitor may be a viable business as it can help reduce competition and increase market share.
8. On-Trend
A viable business should be on-trend and have a product or service that is wanted by the market. The demand must not only be current, but there should be potential demand in the future. Therefore, you will need to be aware of industry trends in the current market that can be seized upon. The product must not be at the end of its lifecycle, and there must be an ability to supply that demand.
9. Motivated seller
A business that has a motivated seller is attractive as it may be easier to negotiate terms in your favour. Look for characteristics in the seller, including age, retirement, or reasons the seller is no longer interested in the business. An owner might want to quickly dispose of their business, particularly if they are retiring, or no longer enjoy operating the business. However, just because the owner is eager to sell and might sell at a lower price, it does not mean that that business is viable. You need to understand why the current owner is selling the business. Are there any issues, like changes in legislation or demand or supply, that the owner is aware of which might impact on the business?
10. Undervalued
A business that is undervalued, but has some other upside can be attractive especially if you understand how to increase the value of the business after completion of the transaction.
11. Distressed or in administration
A business that is in administration or a distressed state may be viable providing the business has an upside. Such as being complementary to an existing business you own, or if it has valuable assets that you can utilize. The owners of a business that is in distress need to realize that in its current state, it only has minimal value. The owner may be amenable to entering into a transaction whereby you control the process, and on your terms, where the purchase price is paid in increments rather than one lump sum on completion. However if the business is being overseen by an administrator, you might need to enter into and complete the transaction without completing as much due diligence as you would like. It is also unlikely that the administrators will provide warranties, so you need to comfortable that there might be some unknown elements and risks in buying a distressed business.
12. Upside
A business might not be profitable, but may have a combination of factors which make it a viable business. Look for a company or business to acquire, which even though it might have a negative aspect, it also has an upside.
For example:
- It is underperforming, but you can identify areas which can be improved.
- The sales are weak, but the product being sold is in a growing market.
- There are not many staff members to support the business, but it has robust systems that allow for automation.
- The business doesn’t have a strong brand presence but is situated in a good location.
- The business has longevity and is at least five years old.
The above 12 tips identify features of a business and some of your own characteristics that may help target and narrow down your search - but deeper examination of the business is always required before you make your final purchase
Sharon Robson
Antler Legal
www.antlerlegal.com.au
The following extract has been taken, in part, from the book, ‘Entrepreneur Know How – Mindset and Winning Steps for Buying a Business,’ written by Sharon Robson (Available through Amazon and select bookshops). See: www.entknowhow.com/the-bookstore/