Risk Managing When Buying a Business

The prospect of buying a business can be exciting and you can get caught up in the moment. Before you leap off the edge, close scrutiny is required or your excitement could soon turn to bitter disappointment and end up a very expensive exercise. Ilona Teremi provides guidance on the important aspects to consider when purchasing a business.

After searching for months, you have found that perfect business to buy! The price seems reasonable considering the return on investment it will give you and the industry is something you could be really passionate about.

Whilst some of the asking price may be attributed to the goodwill component of an established business, this in itself is an advantage over starting up from scratch. An established business will have employees already within that business with some knowledge and experience in that industry and you should be able to draw income from it straight away right?

Before handing over any final cheques for the purchase, you will have the opportunity to go through a due diligence process about the business you are looking to buy. Make sure you have researched the industry so you know what questions to ask the current owner of that business. Prepare a list of your questions and record the answers on a sheet so you can refer back to them at later date if needed. Also specify the nature of the documents you would like to look at and ask if you can retain copies of anything you inspect.

The real danger in the due diligence process is that it is costly to engage lawyers and accountants to help you with this process, which will make it tempting for you to do it all your own. To help you manage costs, think about what parts in which you could really use your advisors key skills and split the tasks. For example, you might want your accountant to review any financials further uncovered in due diligence and point out red flags which you can then ask more questions about. Your lawyers might be asked to review any key contracts or employee liabilities.

Assess how forthcoming the owner is being with their answers. Ask the owner what transition period is on offer and make sure all transitioning requirements are outlined in your contract for sale. Whilst you may have your heart set on buying the business, be prepared to walk away.

If you can’t walk away, have a plan B ready to go in the event that things turn out a bit differently to what you expected after you have purchased the business. More importantly, ensure you have enough spare cash set aside afterwards in case you need to invest in new machinery or systems or employee leave payouts!

The lease for your premises is an important aspect to consider too. The landlord may prefer you to sign a new lease rather than to take an assignment under a current lease, which may have a short term left on it. Consider taking up a new lease only if there are advantages in doing so, such as the ability to negotiate better terms and secure a longer period at the location where the business is currently situated. Dealing with a new lease can, however, add to costs and your stress and it may be that an assignment is the better option until you settle into running your new business.

There are many other aspects to cover when looking at buying a business but ultimately it comes down to what value you as the new owner can add to that new business. What skills do you already have that you can transfer to this business and how will you make it your own and take it to the next level of growth.

Exciting but challenging times lie ahead for the brave at heart!

This article was published in Women’s Network Australia:  Buying a Business