Acquiring an existing business can be an excellent path to entrepreneurship, though it comes with its own set of challenges. Follow this guide to navigate the process effectively and become a business owner the right way.
Steps to Buying a Business
- Assess Your Readiness
- Choose Between an Independent Business and a Franchise
- Conduct Thorough Research
- Perform Due Diligence
- Determine the Business’s Value
- Make an Offer
- Arrange Purchase Contracts
- Secure Financing
1. Assess Your Readiness
Before diving into the search for a business, determine if you are prepared for the responsibilities of business ownership. Consider if you are ready to make daily decisions, manage time efficiently, and handle various roles, from sales to financial management.
2. Choose Between an Independent Business and a Franchise
Deciding whether to buy an independent business or a franchise depends on your personality, preferences, and financial situation.
Independent Business: Offers complete control over decisions and flexibility to implement changes based on market conditions or personal interests. You are not bound by specific terms and conditions.
Franchise: Provides the security of a larger organisation with brand recognition, bulk purchasing power, marketing support, and training.
3. Conduct Thorough Research
Just like inspecting a car before purchase, a detailed examination of your potential business is crucial.
Find a Suitable Business: Choose a business that aligns with your interests and passions.
Understand Costs: Know all costs involved, including initial investment and ongoing running costs.Assess Strengths and Weaknesses: Investigate why the business is for sale, its legal
structure, credit status, staff and customer satisfaction, supplier relationships, and competitive landscape. Visit at different times and analyse its reputation through social media.
4. Perform Due Diligence
Due diligence involves a detailed examination to evaluate if the business is a good investment. Conduct this with your lawyer, accountant, or business advisor, focusing on:
Financial Matters: Review income statements, balance sheets, tax returns, profit and loss statements, stock levels, and details about assets.
Legal Matters: Check intellectual property, trademarks, patents, existing contracts, and any legal issues.
5. Determine the Business’s Value
Benchmark the business against similar ones on the market, considering both tangible and intangible assets like goodwill. Common valuation methods include:
Net Worth Calculation: Difference between assets and liabilities.
Capitalised Future Earnings: Valuing the business based on its potential future earnings.
6. Make an Offer
Prepare to negotiate. Start with a reasonable but low offer and increase if necessary. Know your highest acceptable price and stick to it. Seek advice on handling intangible assets and be ready to walk away if the deal isn’t right.
7. Arrange Purchase Contracts
Draft a purchase contract to make your agreement legally binding. Include details like:
- Purchase price and payment method
- Seller’s involvement post-purchase
- Restraint of trade covenant
- Conditions covering contingencies such as inaccuracies in financial information
- Always consult legal and financial advisors before finalising the contract.
8. Secure Financing
Explore financing options such as secured and unsecured loans. Prepare a solid business plan, demonstrate good credit history, and ensure you can provide the necessary security for theloan. Consulting a finance broker or using an online comparison tool can help find the best loan options.
If you can finance the purchase without borrowing, you’ll retain all profits and avoid loan repayments.
Conclusion
Buying a small business involves many considerations, but with thorough preparation and the right approach, it can be a rewarding process that sets you up for future success. If you’re ready for the challenge, start today and take the first steps toward business ownership.
Contact us today to learn more:
(03) 9103 1317
info@abbass.com.au
