On the surface buying into a small business can seem easy. There aren’t a lot of laws to negotiate, and payment can often be done in a single cash-based transaction. However, there are a lot of hidden pitfalls that could make this one of the worst decisions of a person’s life.
This is why investment experts recommend doing “due dilligence” before you transfer all of your money. Here are the most important things to look for when buying a small business.
“It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
When buying a small business there are a number of things that need to be checked before pulling the trigger and signing the contract. Doing proper due diligence will ensure you don’t invest hard earned money on a lemon. Here are the five most important things to look out for.
Carefully examining the finances of the company is vital and bringing an expert on board to do it for you will ensure you don’t miss those hidden details that could be signs of a faltering company. Let us examine your past financial statements and tax returns for you to discover trends and establish whether sales are on the way up or down.
We will also look closely at the assets and liabilities of your company, review the status of any inventory, equipment, and physical assets and analyse your likely costing for maintenance, necessary upgrades and stock issues. This is all essential as buying a company and then finding yourself in an immediate cash flow crisis is the worst possible start to your hopeful new venture.
Does the company you are buying depend on one invention or many? If so, have those inventions been patented, copyrighted or trademarked? And just who owns those things? It’s no good buying a business only to find you now owe the former owners for the rights to using their creations.
The first step is to examine the internet for reviews. Perhaps the previous owners have been rude and undermined any goodwill that should have arisen from an otherwise excellent concept? Maybe the much-vaunted invention isn’t quite as good as expected?
Speak to key customers and ask them their opinion on a takeover. Does it bother them or will they stay on with the company when it has been sold? Does the goodwill of the business rest with the product and the business itself or is it personal to the current owners?
Where possible conduct employee interviews to fully understand what they think of the company, how they believe it can be improved and whether they are planning on staying on if there is a new owner. The employees may be able to spot gaps or weaknesses you may not easily see, but more importantly may also reveal undiscovered areas for expansion.
A full employee analysis will, with the help of your accountant, also help you determine just where there are gaps that need to be filled, what training still needs to be done, and most importantly, what all of that will cost.
Take a look at any long-term existing contracts. Anything from a rental agreement to a customer service contract could reveal problems. Are there any burdensome terms and conditions that you will be locked into? Is there a customer who has to be serviced at an impossible rate, or a landlord who is expecting ten years of rent before you can move your headquarters? What are the costs of exiting these contracts, and can you afford them if necessary?
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