10 Key Things to Consider Before Buying an Existing Business

I have often heard new business owners say, “I wish I had known that at the time” or “If I had understood that more, I would have made a different offer” or things of a very similar nature…

And so, while buying an existing business can be a very good opportunity, it is essential to consider several key factors before making the decision. Here are my top ten (but not exclusive!) things that you need to consider and understand:

1.     Am I Enthusiastic About the Industry and the Business?
Before committing, assess your passion for the industry the business operates in – every opportunity is worth looking at but not every good opportunity is not necessarily the right one for you. If you are not genuinely interested in those products or services, long-term, success can be challenging. Your enthusiasm and dedication will directly impact how well you manage and grow the business.

2.     What Is Its History of Profitability and Cashflow?
Review the business’s past financial performance. Consistent profitability and positive cash flow are key indicators of a healthy business. Be sure to examine balance sheets, profit and loss statements, and tax returns for the last few years to understand these key factors.

3.     What Am I Buying – Shares or Assets?
You need to understand whether you are being asked to buy the business’s shares or its assets. Purchasing shares means buying the entire company, including its liabilities and this comes with additional risk factors. Buying assets typically involves acquiring specific items like equipment, intellectual property, or inventory, without taking on the company’s debt or legal obligations. This is the more common and lower risk option.

4.     What Are Its Future Prospects?
Examine the business’s future income and profit growth potential. Look at industry trends, market demand, and the company’s strategic positioning. A business with good prospects offers greater potential for long-term success, while a declining business may require substantial investment to turn it around.

5.     Is It Reliant on One Key Person or a Few Key Customers?
Businesses dependent on a single person or a small group of customers for most of their revenue are risky. If that person leaves or those customers switch to competitors, the business could suffer greatly. Diversification in both staff and customer base is important for sustainability unless long term supply contracts are in place.

6.     Is It Systemised and Well Managed Currently?
Evaluate how well the business is managed. Look for established and documented systems for the day-to-day operations, marketing, customer service, and inventory management. Well-defined systems and processes in a business will allow smoother transitions and continued success after a purchase.

7.     What Is the Quality of the Information Available to You About the Business?
Availability and access to clear, accurate, and comprehensive information is important. Ensure the seller provides detailed financial records, contracts, and operational information. If there are discrepancies or if they are unwilling to share certain/important information, that should be seen as a red flag and could signal potential issues.

8.     Who Are Its Main Competitors and What Are the Barriers of Entry to Others?
Research the market and its main competitors. Identify the business’s main competitors and assess what makes it stand out. Are there significant barriers to entry, such as high capital costs or regulatory hurdles, which protect the business from new competitors? If not, this risk needs to be considered carefully.

9.     Are the Underlying Assets of Good Quality or Is There a High Component of Goodwill Being Asked For?
Understand the value of the business’s assets. Are assets like plant, equipment, and any buildings/fitout in good condition? If the seller is asking a high price reflecting a substantial goodwill component, carefully evaluate if the business’s profitability, reputation, brand, or customer relationships and prospects justify that.

10. Is the Brand Known and Respected?
Finally, assess the strength of the brand. A well-established and respected brand can provide a solid foundation for growth, offering customer loyalty and marketing advantages. A business with a poor reputation may require significant effort and expense to rebrand and restore credibility.

It is your assessment of these factors that will determine what the business is worth to you, and what your offer and terms will be.

Engaging an advisor like SAS in the process will provide expertise, independent and critical analysis to support your decision and then support you through the purchase negotiations, documentation, and settlement.