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How to Buy a Business – Choosing the Right Business

Buying a business with a good set of figures is no guarantee that you will be able to make a success of it. In a small to medium business, those figures are often a record of what the previous owner did, and may be only a very poor predictor of how you will perform in the business. Don't buy a hospitality business if you have no experience in dealing with the public, or an engineering business if you are a pastry cook, just because it was profitable for the previous owner.

  • Choose a business where you have an advantage by way of qualifications, or experience. Business these days is generally highly competitive, and you need to be at least as good as your opposition, to stay in business.

  • Choose an occupation that you enjoy. Small business often involves long hours, and requires great enthusiasm to motivate staff, and deal successfully with clients. This can become very tedious if you are not happy at it.

  • Check the Vendor's reason for selling. There are many legitimate reasons for selling a perfectly good business, such as retirement, marriage or partnership difficulties, deceased estates, other business interests, or even just simple "burn-out". But sometimes, there can be a more sinister reason, such as impending problems with a lease, technology changes, new competition, demographic or infrastructure changes, obsolescence, impending major capital outlays ..., the list is infinite. This is where it could be advantageous to have someone experienced working on your side. Every business has its problems; the trick is to know what they are, and have a strategy for dealing with them.

  • Understand clearly the nature of the business, and how much capital is required to run it. As well as the cost of purchasing the business, you need to have sufficient capital to finance stock, Debtors and overheads. The working capital requirements are clearly different as between a retail business, a wholesaling business, a manufacturing business, and an importing business.

  • Understand the cash flow characteristics of the business, and any seasonality. Just because there is a profit shown at the end of the yearly accounts, does not necessarily mean that there will be cash available at critical times to meet necessary costs, such as interest, taxes, and your living expenses.

  • Be pessimistic. The business will probably experience a bit of a downturn until you "get up to speed" with it. The current boom might end the day you take over. This is not to say you should not go ahead and purchase the business, just that you should have contingency plans and leave some reserves, just in case.

  • Ensure that you have the means to purchase, and operate the business, and fund any planned growth or development of the business.

  • Try to get to know the Vendor, to gauge whether you can successfully "fit into his shoes", and run the business at least as well as he(she) did.

  • Try to meet the key employees, to make sure they intend to stay, and that there will be no major personality clashes. In many cases, Vendors won’t want you to talk to the staff until negotiations are at a fairly advanced stage, and in such a case, you can insert appropriate provisions in the purchase agreement.

  • Don't plan any major changes to the business in the changeover period, unless you are very sure of what you are doing. A smooth transition with minimum customer impact is the usual road to success.

  • Be prepared to follow the previous owner's tried and proven methods, once again unless you are very sure of what you are doing. This often constitutes a significant part of the purchase price, and it would seem a shame to throw it away.

Click here to read How to Buy a Business – Assessing the Profitability of a Business.

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Article written by Rudy Weber. Published with permission from Rudy Weber, Lloyds Business Brokers.