It might seem like a good bet buying an existing business but there’s a lot to take into consideration. In my 22 years in business I’ve seen 90% of business owners overestimate how much their business is worth. So you need to be very careful, even if it’s been professionally valued. Here’s a list of what you need to think about:
1. Is it profitable? You must ensure you get at least the last two years accounts (prepared by an accountant) from the business so you can find this out. If it’s not profitable then you have to find out why not. Good idea to have a conversation with the current owner about this but take what they say with a pinch of salt. Have a good look at point 3 for where to look.
2. What are the monthly income and expenses? If the business currently spends more money than it brings in each month then you might have to bail it out for several months before it starts to break even. It can take a while for your marketing efforts etc to pay off, so bear that in mind and plan for having some cash put aside to weather this.
3. Ask to see the management accounts and Key Performance Indicators. This will give you a really good insight into which areas of the business you can improve upon and will lead onto number 4.
4. Find out if there are any problem staff members. When you take over the business as a going concern then you will take over the staff too and their employment record will be unbroken. If you have to get rid of someone who is underperforming then you need to go through all the normal HR procedures. Check with your HR advisor before doing anything.
5. Think really hard before you buy the limited company rather than just the assets of the business. If you buy a limited company from another owner then you inherit their liabilities, including disgruntled customers who may sue the company at a later date.
If looking at a P&L or cashflow is not your strength (and to be honest it’s not something many people feel good about), then make sure you don’t end up with a business that’s nothing more than a strain on your resources. Get a really knowledgeable outsider to look at this for you and point out where the problems might arise. This is something we do for our clients regularly.