Buying a business? Here’s how to reduce your risk

StuartGeneral

Are you thinking of buying an existing business? Before you pop your celebratory champagne, remember that buying an established business is a big commitment of time, money and energy.

Buying a business and reducing the risk

Averting the risk when buying an exiting business is essential to the success of your purchase. Check the following things to reduce the risk in buying a business

  • 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.
  • Ensure all plant and equipment is in good working order. You may need to consult a qualified tradesperson to assess.
  • Check vehicles are licensed, and when the licences expire.
  • 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.

How to value the business to ensure a fair price

Here are three methods used to value a business: 

  1. Return on investment

This method measures the return on investment (profit before owners salary) received from an investment (the purchase price) and is calculated using the following formula:

ROI   =   net profit x100 
price

  1. Asset value

This technique adds the assets of the business (for example stock, plant and equipment) to a goodwill figure to arrive at the price of the business.

  1. Market value

This method is based on multiplying the turnover of the business by an industry multiple. This technique is mainly used for professional practices such as legal, accountancy and medical practices. It is rarely used for retail businesses.

Need help purchasing a business?

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