Business BLOG

There is no guarantee when buying a business that it comes with a sound set of financial information or that you will be able to make a success of it. In a small to medium business, financial information is often a record of what the previous owner did, and consequently may not be a valid indicator of how you will perform in the same business. For example, unless you have experience in the hospitality business don’t buy a this type of business. If you have no experience in customer servicing, computer technology or a baking don’t buy these types of businesses just because the current or previous owner was profitable or successful. Here are a few rules you reasonably follow when deciding what business to buy: Selecting a business Try to select a business where you have some level experience and or expertise. Business tends to be highly competitive; being at least as good as your opposition, will give the best advantage for staying in business and being successful. Select an occupation in which you enjoy the tasks and daily activities. Owning and operating a business requires long hours, as well as great enthusiasm. Motivating your staff, and dealing successfully with clients for some can be quite a burden and may become tedious if you do not enjoy or do not have the propensity for these types of tasks. Validate the sellers need to sell Validate as best as you can, the owner’s reason for selling. While there are many legitimate reasons for selling a perfectly good business such as: Retirement Life changes such as marriage or additions to a family Business “burn-out” Sometimes, other reasons such as upcoming lease renewal issues, increased competition as well as many other negative factors may be the primary influence(s) of the pending sale. Having someone with experience working on your side will be advantageous to selecting the appropriate business for you to purchase. Many businesses have problems; the trick is to know what they are, and create a strategy for dealing with them. Financial Considerations and Implications Try to understand and prepare for all financial implications of the business. This includes and is not limited to: Capital required to run the business Cost of purchasing the business Capital to finance stock Debts Overheads. Working capital requirements vary greatly between different business types: The financial requirements for a retail business are vastly different than those of a wholesaling business. The cash flow characteristics of a business as well as any seasonality are of paramount concern. Profits shown in end of year accounts do not necessarily mean cash is available at critical times. Necessary costs such as taxes, living expenses or advertising costs may produce a negative cash flow during a slow season. Try to leave enough financial reserves at start up for unforeseen expenditures and living expenses. Some businesses may experience a downturn at change of ownership due to various reasons. Negotiating the previous owners limited continued involvement may help to lessen some of the impacts of new management/ownership issues. Having the previous owner available until you “hit your stride” in running the business and/or the public/customers become “comfortable” with you as the new owner/manager may help lessen these impacts. This does not imply avoiding the go ahead purchase of the business, but having plans and contingencies in dealing with these types of events may help in the success of the business. Funding for the purchase, operation of the business, as well as any planned growth or development of the business should all be considered and qualified prior to making an offer for a business. Staff Considerations Meet any and all key employees prior to purchase. Knowing whether they intend to stay, or if there will be major personality clashes will give you additional insight on your start up issues. In some cases, sellers may not allow you to speak with employees until the purchase negotiations have advanced to contract signing. To avoid this obstacle have your agent add appropriate provisions/contingencies in the purchase agreement. Making Changes Once purchased, new owners begin planning and making significant changes to the business. Try to avoid any major changes to the business during this period, unless you are 100% sure of what the outcome will be. Minimizing or implementing business changes slowly, will often effect a smoother transition and lessen the impact to your customers and your businesses success. When purchasing an existing business, you are not only purchasing a physical location and inventory, but also the customers, good name and reputation of that business. Following the previous owner’s proven success methods, will offer you a significant advantage in making the business “Yours”. Summary Using qualified help, such as a commercial real estate agent or business broker during your search, investigation and purchase for a business will help to minimize many of the negative impacts of your purchase. When buying a business, it is of great value to be diligent and honest with yourself in your assessments of the financial responsibilities as well as your own ability and areas of experience in running the business. © Copyright 2008 Jennifer MacKay.