Things to consider when buying a business

Have you heard of the term named acquisition or acquiring? Well, it means when your company is buying another company’s stock or buying the ownership. This is called acquisition when you buy an existing or non-operational company.

Purchasing a business or acquiring a business organization is a nice strategy to start a business. Buying a small business organization is less risky than creating a new one from scratch. For example, you can diversify a portion of risk with commercial banks by taking a loan. Besides, it is easier to start. However, you need to put in some effort and know few critical things while buying a functional business already making money.

The benefits of buying an existing business are many:

  • It already has its location.
  • The business has all the equipment, inventories, and works in the process set up.
  • The company perhaps had a mainline of customers who make regular purchasing.
  • Employees are there, and so you may need not to hire a new set of employees.
  • The business has a historical record, which could help you to understand the outcomes of past
  • decisions and steps taken by the company.

However, you start a business or purchase an existing one, there are always disadvantages.  It always will have a risk to some extent. You will be able to reduce the risk if all of your actions are taken properly knowingly.

Things to consider when buying a business

Purchasing as existing business can be beneficial from many points if certain points are met. You can consider the points discussed below.

Demographic and Political Changes should be Considered

If lots of small businesses are being sold in a specific area, there must be something wrong. Or, there may be are some valid reasons to sell those businesses. Maybe, they found new opportunities that influenced them to change the path, or the area became less productive to conduct a business and make a lucrative profit. So, what is the real reason?

As it is happening in a specific area, it could mostly be connected with the demographical or political changes.

Demography is related to the statistical report of an area’s birth rate, death, Income, etc. And political changes are related to tax changes or any other opportunities or negative changes in a room. Changing the zoning law is associated with the political matter.

The Management Style, the Existing Owner, is Following

There are different management styles to run a business organization. A small business also follows a specific style of a mix of two.

A company must have a manager. The manager leads his/her employees. But what type of managerial path/style he/she is following? Is it autocratic, paternalistic, or democratic? Is it directive or participative?

When you know the management style the manager is following, it will be easy for you to lead the employees and the organization.

What Type of Qualities and Skills You might Need to Run the Business?

The qualities and skills are the key things you need to run any business. Different businesses require different types of skills. For example, if you want to start an investment firm or broker’s house, you will need to have a vast knowledge base on accounting and finance.

So, what are the skills you will need to run the business? Is it one specific skill or many? Will you have to learn new skills? Will you hire new people who have those skills? Or the existing people will do? Think wise before you take ownership.

Discretionary Income (DI) and Owner’s Discretionary Income (ODI)

Discretionary Income means the portion of Income is allocated for spending after taxes and investment. This portion is kept to spend on luxurious items. If the inflation increases, the ODI decreases.

You need to find out the ODI of this area. If ODI increases, your product buyers may lose purchase power if the product is a luxurious one. So, the sale is affected by the changes in ODI.

Owner’s Discretionary Income is the amount left after paying all the operational and non-operational expenditures (except the owner’s salary). So, an owner keeps paying employees’ wages, suppliers’ expenses, necessary rents, overhead expenses, and taxes. Are you happy with this amount? Will you be able to survive? If not, it may require investing more money to run new operations or taking a new effective strategy.

The Nearest Competitor Analysis

A business competitor is a person or a business that is providing the same or related product in an industry. A competitor maybe is weak or strong. Competitor analysis is one of the important tasks while you are buying an existing business.

Is the competitor serving the full area? Is the capacity bigger than that of yours? Is it weaker or stronger than you? What is their past record in terms of suppliers’ relations? Does the product have better utility? Will you be able to compete with them? Is it just a local business or a franchise?

If all of the answers satisfy you, you should go for it.

Seller’s Debt and Sales Taxes of Previous Periods

Sellers’ debt is the amount of money other people owe to the owner of a business. If it is an old business organization and has recognition, in most cases, it has debt obligations. Sales taxes are the taxes payable to the government or the state.

When you buy an existing business, you are paying the current value of the company. You never pay the debt owed by the previous owners. So, you must check all of the necessary documents before purchasing them. Also, you can publish a buying notice in the local daily newspaper. Also, check the tax documents. Did the owner pay all the taxes? Because you are not going to pay any previous taxes.

Local Business Reputation of the Business

Business reputation is not made in a single week or two. It is a long-term asset for the company. When a business or its product has a positive reputation, you have an advantage; for the opposite, you have a disadvantage.

So, before making the purchase and fill out the documents, be sure what type of business reputation did it build in the past years? If the product reputation is terrible, what steps will you take to restore the reputation?

Conduct the SWOT Analysis

SWOT Analysis is the acronym of strength, weakness, opportunities, and strengths.

Why is it important? Because when you do a SWOT analysis of your business or the competitor’s, you are finding the strength & weakness, and opportunities & strengths of that organization which will help you decide on the purchase.

So, do a SWOT analysis of the existing business and find out the SWOT of that small business. It will surely help you to make a vital decision.

Exit Plan for the Business

What is an exit plan? And how can it help you to reduce your risk? Why savvy businesspersons make an exit plan?

An exit plan is planning for exiting the business or selling off your business. It is necessary because it tells you why and when you should leave or sell your business.

Exit plan reduces the associated business risk to a large extent. When you make an exit plan, you calculate the future value of the business. Also, you predict if the deal will go up or down. So, you know the things you will be doing when your business fails. That is how it reduces the associated risks.

Bottom Line

Intelligent people know that all businesses cannot be successful. There must be some risks and failures. Some risks you may not know about which may result in business failure. So, they make an exit plan for their business.