We’ve dealt with enough entrepreneurs over the years to know that going it alone is fraught with dangers. Setting up on your own, especially when business and consumer sentiment is so volatile, is very often a difficult choice to make.
However, there are ways to give yourself the best start possible. One such avenue is to buy an existing business. Buying an existing business can add significant value to a portfolio or give an entrepreneur a head start. However, without proper analysis, costly or even ruinous mistakes can easily be made.
As we’ve all seen, the tide of emigration continues unabated. Perhaps what isn’t so evident is the effect it has on the local economy here. As people continue to leave the country, they leave behind businesses that were presumably, at one time or another, profitable entities. Of course, it doesn’t make sense to up sticks and leave behind a company that more than pays for itself, but with some digging, there are businesses out there that could well compliment an existing portfolio with a little cash and a lot of hard work.
For anyone buying a business, or thinking of taking the plunge, the first thing to identify is the opportunity. Ask yourself if it stands alongside an existing business or if it is in a new area where you’ll need additional expertise to make the acquisition successful.
If you have established that a certain business holds opportunity, it’s time to look at the nitty gritty. Insist on an information pack from the seller – this should provide soft details like when the company was formed, its background and current profile, identifying key personnel and senior management. It should also mention whether those people are willing to stay on or not during and immediately after any possible buy-out to make the transition as smooth as possible.
From there, one can expect detailed financial analysis of the company and its performance over the past three years at least. If this is not forthcoming, insist on it. This should contain details on sales by product and/or sales by geographic area, for example. It should also demonstrate, in detail, the company’s history with its top clients and customers, and outline any contractual details that are in place for the coming months and years. It is vital that this information is timely and correct – having major clients pull the plug at the beginning of a new era for any company can stop any progress cold.
Of course, having the financial clout to buy the business in the first instance is a must, but how payment is transferred varies from case to case. In my experience, unless the business is a local shop, for instance, handing over the full agreed amount in the beginning should be avoided. An earn-out period is the best option – by incorporating this into any contract gives the new owners some breathing room when it comes to cash flow and will also allow sufficient time for any anomalies to show up in the accounts history.
Buying a business, just like setting up a company, can be a tricky path to negotiate but some careful planning, sound advice, along with knowing what to look for at the full disclosure of accounts stage, will help smooth the ride.
DCA Accountants and Business Advisors