10-Step Guide to Buying a Business
Buying an existing business can be easier than setting up and launching a new business from scratch. Buying a business requires a major commitment of time, money and energy. Doing your research before making a big decision is essential, which is why we’ve summarised a quick 10-step guide on what you need to do to buy a business.
1. Find the right industry for you
The first step in buying a business is finding out which industry you’re passionate about and which preferably matches your skill set. The simple question of ‘why do you want to buy this business?’ might not be an easy one to answer, but having some thought on what industry you enjoy or have knowledge in can help.
Think about the following questions to help narrow down the industry for your business purchase:
- Do you have some working knowledge of this industry?
- Do you have insight into this industry that could be used as an advantage?
- Does the industry have a need that hasn’t been met?
- Is this a growing industry?
- Do you relate in some way to the customers in this industry?
Everyone has their reasons for wanting to get into the business but when you have a big investment decision such as buying an existing business, you should always take bias out of the equation and think from an objective point of view.
2. Have finances in place
It’s no secret that buying and owning a business requires a lot of money, therefore, it's extremely important you have your finances in check and have a budget of what you’re willing to spend on an existing business for sale. Prior to making a business purchase, you need to work out how much you can afford to put towards the business. You will need to take into account payments for employees, rent, utilities, and other variable costs. Once you have this you can determine with ease whether you will be able to afford this business opportunity or not.
Having your finances organised means you’ll be aware of money coming and going and can prepare you for the unexpected and long journey of a business owner.
3. Shortlist businesses
Once you know what industry you would like to purchase into and roughly how much you can afford to spend, you will need to shortlist potential businesses you wish to buy. Take a look at business listings for sale from reputable business brokers and narrow down the list by considering the following:
- Where is the business located?
- What is their revenue?
- What is their asking price?
- What is the size of the business?
- How long has the business or franchise been in operation?
Shortlist however many businesses interest you but it's important that they meet some criteria that make it beneficial for you. For example, you might not want to look into buying a business that’s over 40km away if you’ll get stuck in rush hour traffic every day.
4. Do your research in person
This is the part where you physically visit the business or a similar franchise of the business to get a closer look at the business from a customer’s perspective. Take time to look around the exterior of the business you’re interested in as well. Are there similar businesses in the area? Is a new competing business being built up in the next year? Speak frankly with the business owner or business broker that’s selling the business and determine what they are looking for. Uncover and see for yourself how the business truly operates and if you can see yourself making improvements to further grow the business.
5. Valuing the business
In this step, it's time to bring in the experts. You know what business you want to purchase, you know the industry, and you have a benchmark of the selling price. An expert in business sales such as a business broker can provide you with a proper valuation of the business you’re looking at. Assets such as real estate, equipment, plant, and machinery will often make up the bulk of any valuation. These are easier to appraise but turnover, profitability and ongoing contracts are much more difficult.
Once you found the business you’re after and you’re confident in the industry in which it operates, you can start negotiating and directly getting in touch with the business owner. Be upfront and ask them the price and make an unbinding offer either verbal or written. During this time you can gauge through the conversation if the business is willing to sell for a lower price.
7. Make an offer
Ready to get the ball rolling? It is time to put in a formal offer to the business broker or business owner. This is where you will need to hire a business lawyer to prepare your formal business offer and draw up a purchase contract to make your agreement legally binding.
8. Perform due diligence
Conducting due diligence is when you closely examine the business in detail to assess whether it’s a good investment. This can be done after both buyer and seller have agreed to a principal deal, but before any contracts are signed. Usually, you would need to sign a confidentiality agreement before you access any important information.
While conducting due diligence, you’ll need to carefully review all matters including
- Income statements
- Balance sheets
- Tax returns
- Profit and loss statements
- Stock levels and supplier details
- Intellectual property
- Registered patents
- Existing contracts and contractual obligations
9. Exchange and sign contracts
If there were no surprises during due diligence, then you’re ready to proceed. Once you’ve negotiated the terms and conditions of the buying business sale, there’s a final purchase agreement that needs to be signed by both the seller and buyer. After contracts are signed and exchanged, you’re ready to choose a settlement date and be granted the keys to the business.
Congratulations! You are now a proud business owner and have successfully completed all of the key steps to buying a business.