What to Consider Before Buying a Business

by Dominique Schuh

Have you ever fancied the idea of buying a business and being your own boss? Or perhaps you're already in business and you're considering buying another to add to your existing operation? Listed below are some of the key points we feel you need to consider before taking this step:

1. Be really clear on your understanding of the industry you're getting in to. Consider, do you have any prior knowledge of this industry other through observation? Is it the kind of industry that can be learned about quickly or, is it really "generational"? If you have limited prior knowledge, be prepared for a very steep learning curve and also consider where you'll get your learning from.

2. Also, understand how easy or difficult the industry is for people and other competitors to enter. For example, a lawn mowing business is relatively easy for participants to come and go from because it requires a relatively low amount of capital to get started. On the other hand, farming requires a large amount of investment, which means it may be harder for real competitors to enter.

3. It will pay to be very clear on who your market place (customers) are and then how you intend to reach them. For example, are you a specialty store owner or service provider and who are your customers? Where are you then most likely to get more of those customers?

4. Is the market place you're entering already saturated? Setting up another coffee shop in an area that already has many coffee shops may just be a recipe for disaster unless you have a very significant point of difference that people are willing to pay for.

5. In that vein, does the business you're buying already have a unique proposition? If so, will that unique proposition leave when the previous owner also leaves? Or, is it the staff that really set the business apart and will they stay on when there is a change in ownership?

6. How easy or difficult will it be for you to get finance for the business you'd like to buy? This can depend on your existing level of borrowing as well as on the nature of the business you're buying. For example, if there's a heavy reliance on the goodwill component of the business, a bank may look less favourably on this, when compared to something that can easily be valued such as machinery.

7. Is all the infrastructure of the business already in place or is this something that will need further investment in during the years ahead? In this sense, you'll need to check the length of any leases in place, as well as the age of the machinery that's already there.

8. Finally, we suggest you do a forward projection for 3 years time – one where everything goes to plan and then another that allows for significant contingencies of less growth. How does the business look if there's an economic recession?

If you're weighing up any of these options or if you'd like more of our input on these ideas, support you in working through due diligence or look at a potential opportunity please don't hesitate to contact us.