Buying a business? How due diligence can save you from potential disaster

CraigGeneral

Buying a business without conducting the right due diligence checks can mean buying a business with a chequered past.

Before you ready yourself for ruling a business empire, assemble a team of experts to help you see the woods for the trees. We know it’s exciting, but it pays to consider some key questions before you get wrapped up in the emotion of the purchase.

Reduce the risks and ask questions

So you’ve found the perfect business and you’re ready to purchase. Before you do, be sure to visit your accountant and do the sums. If the numbers work in your favour, you’ll rest easy knowing you’ve made a sound business decision. On the other hand you might have your bubble burst but sometimes uncovering some hard truths early on will save you pain and lost income later on.

Key questions to consider when buying a business

Buying an existing business can be a great opportunity to hit the ground running and avoid the disadvantages of starting from the ground up.

1.     Money talks: Can I afford it and how will I fund it?

Develop a business case for buying the business. Invest some time in scenario planning, to help uncover all the ‘what ifs?’ with your accountant. Then develop a solid business plan which details not only how you can finance the purchase but sustain the business.

542 Tip: Get certified financial statements that accurately represent the trading figures of the business being sold. Figures provided under a disclaimer indicate the vendor or person preparing them is either unwilling or unable to vouch for their accuracy.

2.     Is the business profitable or is it a pie in the sky?

Let your accountant drill down into the real numbers. Crunch them until they’re meaningful figures, not just high-level, face value fluffy stuff that most people take as gospel.

542 Tip: There are three methods used to value a business to ensure fair price – 1. Return On Investment (ROI) – measuring profit before owners salary against purchase price; 2. Asset Value – a goodwill figure based on the sum of assets within the business; 3. Market Value – based on multiplying the turnover or profit of the business by an industry multiple.

3.     What am I actually buying?

Businesses for sale can be murky. Sometimes you are buying bricks and mortar, other time you are buying the goodwill or shares. All of which pose considerable risks. Be clear on what you are buying and avoid nasty hidden surprises after purchase. Remember: if it seems too good to be true – it probably is!

542 Tip: Ensure all equipment is in good working order. Check vehicle expiry dates and make sure that there are no encumbrances on motor vehicles, motorbikes, boats or farm machinery. You can check online on the Personal Properties and Securities Register.

 

We’ve covered the benefits for buying an existing business here.
If you’re thinking of buying a business and need advice, talk to us and arrange a consultation.

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