Buy A Business is a big deal. It is probably the largest financial decision most people will make. In addition to the money you have invested, you have your time, energy and reputation on the line. You must do everything possible to reduce risk while maximising returns by purchasing the right business at the right price.
Make Sure The Company Has A Solid Management Structure.
When buying a business, one of the most important things you need to do is examine the management structure. You want to ensure that whoever is Selling a Business has a solid understanding of what makes it work.
This means talking with current managers and employees about their roles in the company, how they fit in with other departments and how they handle customer service issues. It’s also important to look at recent compensation changes or promotions within these departments. This will give you an idea of where everyone stands within the organisation and how much trust they’re given by senior leadership.
Evaluate Financial Statements
You need to evaluate the business’s financial statements before buying it.
Financial statements are a snapshot of your business at a particular time and provide important insights into its performance. They include:
- Profit & Loss (P&L) statement – shows your income, expenses and profit or loss for some time.
- Balance sheet – shows your assets, liabilities and equity (the difference between them is known as net worth) at one point in time.
Calculate The Net Profit For The Last Three Years.
You need to know the net profit for each year, or else you won’t be able to figure out what kind of return on investment (ROI) you can expect from your new business. To calculate this, take the revenue and subtract all expenses, including taxes and interest payments. That number is called the net profit and represents the amount left over after all bills are paid.
This doesn’t mean that you should only look at businesses that have been profitable every year—you just want to ensure there’s been enough growth in the past three years so there’s potential for future growth. If a business has lost money consistently over the past three years but has shown signs of turning around lately, it may still be worth investigating further if there is strong evidence indicating increasing profitability in upcoming months or years.
Determine Potential Future Growth Of The Business.
- Determine potential future growth of the business.
- Determine if there is a market for your product or service in the area where you want to locate your business and whether it has room for new competitors.
- Identify any potential legal problems that could arise during the transition period by checking with local zoning laws, health department regulations and other government agencies that have jurisdiction over your type of business (i.e., the city planning office).
- Review IRS requirements regarding tax deductions for businesses that purchase an existing operation from another entity (in some cases, this can be nearly impossible to do).
Be Ready For Surprises, Good And Bad.
If you’re buying a business, there are going to be surprised. Some of those surprises are good, like discovering that the seller has already done some work on a key problem with your target’s operations.
The best way to deal with both surprises is to do your homework before you meet anyone from whom you’ll buy a business — or even before you set foot in any potential acquisition target’s office space.
Conclusion
Although there are many things that you need to consider before buying a business, the most important thing is to do your due diligence and make sure that the company you are considering buying is on solid financial footing. If you’re going to put your hard-earned money into something, make sure it’s going to be worth it!
