7 important steps to consider when buying a business:
Original article can be found here
1. Proven Financial Stability & Profitability is the primary aspect to look for because you want to buy something that is going to perform, and at the very least, has prospects of becoming more profitable due to forecasts of growth.
2. Diversification of Business Income is crucial because it’s too risky to buy a business wherein the main income is derived from one or a few sources. If it is too heavily concentrated in one area, you will have good reason to haggle hard with the seller.
3. Business Systems & Processes are important because you want to see it is a turnkey operation that isn’t going to take too much time to run efficiently. If it’s a business you want but it isn’t up to scratch, beat them down on price.
4. Leases, Plant, Equipment & Machinery are important operating tools of any business. If they are run down, make sure you’ve got enough capital to renew these, otherwise this alone can put you out of business quickly.
5. Management & Organizational Chart: you want to see evidence of this with a clearly defined structure indicating limited owner reliance. If you have time to work this out, that’s great, but what you really want is to know it can run without you if it has to.
6. Buying the Shares Versus the Business: I picked up this great tip from the author of “Your Business Succession,” Leigh Riley, who I met at dinner the other night. Leigh told me that sellers are usually advantaged by selling shares of the company rather than the business, but if you accept this, you need to be aware of the liability factors that could impact you in future. Companies will be held responsible for any of its prior mistakes, and if you buy the company, that means you will also be impacted adversely. One way to mitigate this risk is to insist the terms of sale be accompanied by “run off” professional, product and public liability coverage (funded by the seller) to protect your acquisition with insurance.
7. Exit Planning Prospects for the Future: Something else I learned from Leigh Riley was to think about the business exit planning potential for the future because one day you are going to leave the business you are buying and will want to sell it for a maximum price. If it’s a business that few buyers would be attracted to due to special interest or skills, you better start thinking about that now, before you buy, so you don’t get caught out and strapped for cash later. This is especially important when so many business owners leave due to unplanned events such as divorce, dispute, disability and death. Make sure the business you are purchasing will be saleable through any circumstances.
