Buying a Potential Business
There are a lot of different factors to take into account when looking to buy a business. The variety of things to take into account can seem overwhelming but once you know what you are looking for, it can be significantly easier to achieve.
I consider that the two most important things to take into account are the information gathering and negotiations.
It can be said that doing thorough groundwork is very important as the first step. For example, learning as much as possible about the people behind the business, the business plan of the company, companyÂs accounts, a clear account of where the business is heading, etc. All this will give the investor an idea of how profitable the company is.
There are three golden rules in order to know how the business is performing:
1-Â Â Â Â Â The workers are the essence of the company: by putting a face to a name you get to know what kind of staff and key figures are operating in the business. It is also important to know their point of view about the company and its performance at the time.
2-Â Â Â Â Â The Business plan must be checked: it would be a good idea that somebody within the industry had a look at this in order to ascertain whether the business plan of the potential acquisition is viable and to provide a realistic long term outline for growth.
3-Â Â Â Â Â Inspect the companyÂs books: the accounts must be checked thoroughly to get an understanding of how well the business is doing and what sort of financial inputs and outputs are involved. Look also for any debts, any relationship with previous business partners and any feedback you can get from them.
Once all the above have been checked and the business is considered viable, there are a number of other factors to consider:
1-Â Â Â Â Â Are there any opportunities for growth? Check the growth, sales and profits of the business and see what the potential market is!
2-Â Â Â Â Â A SWOT (Strength, Weakness, Opportunities & Threats) analysis would be very useful to figure out the competitive landscape and your investment position within it.
3-Â Â Â Â Â Your position in the business/company! Will you have voting rights on the companyÂs board? What type of shares will you have? Will you be a silent investor or sit on the board? Will the liability be limited? What kind of share of profits will you benefit from?
Selling a Business
On the other hand if you are looking to sell a business the best indicators of when to sell will be the financial climate, potential buyer profiles and market trends.
The process should begin by estimating the desired goals you want to achieve, including the sale price and when you want to sell. The main aim is to create a valuable and viable business which is attractive to potential purchasers.
It is always important to put in place a strong management team, who can both add value to a business and assist you with preparing for the sale. The management can help develop specific areas, for example, a sales director will focus on building client relationships and improving sales, while a finance director will put in place strong financial processes, enhance cash flow and oversee expenditure. The management team will also provide the new owner with stability after the sale process, which should enable you to exit more quickly and smoothly. The team could even become a potential purchaser via a management buy-out with venture capital funding.
It must be remembered that a business is only worth what the highest bidder will pay. Your view of this may be very different from the view of a prospective buyer, and a business that is profoundly dependent on one person, product or customer may be more difficult to sell. If the business is seen to orbit around you as the business owner, it makes the business less attractive and less valuable. A strong management team supported by a strong brand and reputation shows a strength and depth which is more attractive to potential buyers.
Historic accounting facts are vital but the key to achieving a goodÂ sale price is the current profitability, future earnings and potential risks arising from the change of ownership, for instance the potential loss of customers as a result of the sale. A business that relies on a few customers can be considered high risk and therefore less valuable. Spend time enhancing profitability, minimising risk and working on future earnings forecasts.
As the proposed sale approaches, review every facet of the business and address any problems that could occur during the sale process or which could devalue the business, whether legal, accounting, tax or environmental issues. An internal due diligence exercise must be carried out in order to spot any problems within the company and then resolve them.
In conclusion, it can be said that the most important part of selling a business is preparation the more prepared your business is for sale, the faster it is likely to sell.