China Tyre Expert

Buying a business can be difficult especially

by:Tanco Tire,Timax Tyre     2020-08-12

1. Why do you want to buy a business

Before you begin your search it is important to answer this question as honestly as possible, the answer will save you time and stop you from purchasing the wrong type of business.

It is important to identify why you want to own a business. If you want a regular salary then you should look at a lifestyle business, if you are interested in a long term project then you should focus on a business that will potentially scale, if it's a quick project you're after then turning around a company in distress and selling it on is best. Identify your needs, then go after a business that satisfies them.

2. Buy a business you are familiar with

Running a business and making it a success is difficult and this task will be made harder if you purchase a business you are unfamiliar with. It makes sense to purchase a business that you have some understanding of as this will help you hit the ground running, reducing the time you'll spend familiarising yourself with the product, service, market and industry.

3. Find out why the owner is selling

Once you have identified a business, find out why the owner is selling. Many vendors will simply state retirement, or the pursuit of other interest as the reason why they are selling, however this is not always true. In some cases there are other reasons why the business is being sold such as change in the habits of their key customers, possible law suits, a negative tax change or larger competitors entering the market, etc. Avoid buying businesses that have only been in the buyers hands for a short period of time and business that have ridiculous low valuations without a valid reason, these are red flags for businesses that are under-performing.

Purchasing a business is complex task that will affect other areas of your life so nothing should be left to chance. If you do your homework correctly and ask the right questions the real reason behind the sale will become apparent and this will help you decide whether the business is a good investment or not.

4. Are you passionate about what your about to own

Running a business is a rollercoaster there will be times of pure ecstasy where everything is going right and periods where it seems the world is coming to an end. It is important that you are passionate about whatever business you plan on owning, if not you may find it difficult to motivate yourself during the dark times.

5. Get an accountant and a lawyer

It is vitally important to instruct an accountant to go over the financial records of the company you are purchasing as they can quickly determine whether the business is in a healthy financial position.

A business may appear fine however if the numbers do not add up then the decision to purchase could prove a costly one. Most small businesses are set up to minimize tax and retain as much money for the owner as possible therefore an accountant's opinion is needed to ensure you are purchasing a viable and healthy business, which is possible of generating a reasonable return on your investment.

You should also hire a lawyer to go over the business' legal documents and contracts as they will be able to uncover any liabilities you may possibly inherit and legal responsibilities you may be subject to once you have completed the purchase. The lawyer should also examine the leasehold agreement as some are notoriously complex and can easily confuse or entrap a novice buyer.

6. Make sure you have the funds in place to complete the purchase

In most cases the banks will not provide funds for an acquisition of this nature, so you may need to seek alternative financing if you are unwilling to fund the purchase yourself. It is a buyers' market right now so if you have the funds you can purchase a very good business for a relatively cheap price.

You should also consider the funds needed to run the business once you have purchased it. You need enough money to cover the business' costs for at least 12 months with a healthy reserve for unforeseen events and a reasonable amount for marketing and the other running costs associated with the business.

7. Check the business' inventory, equipment and premises

Inspect the business' inventory, equipment and premises. Make sure there isn't a large amount of unsold stock or redundant inventory on the books. Ensure all equipment is working correctly as you will need to replace old, dysfunctional machinery if you fail to spot this before exchanging contracts. Run the rule over the premises and make sure that it is up to scratch, if it needs a refit you should factor this in to any offer you make.

You should also check the lease on the premises if it has one, you need a reasonable amount of the time on the current lease or written assurances that the owner of the premises will issue you a new lease once you have completed the purchase. It may pay to check who owns the titles of the equipment in the premises, in some cases the equipment can be leased from another company which means you may be forced to purchase new equipment at some stage if you fail to spot this before purchasing the business.

8. Take a step back

If you have found a business you're suited to owning, you've secured the finance necessary to purchase the business and your accountant and lawyers have given you the all clear it is time to take a step back and analyse what you are about to purchase.

Make sure you are 100% happy with the business, work out any issues that may still be lingering, anticipate any market shifts that may be on the horizon, prepare a best and worst case financial scenario for the company, will the business remain profitable if it fails to perform as expected or if the market takes an unexpected turn? Ensure you have covered all angles and you're happy to go ahead with the deal.

9. Make an offer and negotiate a great deal

Most buyers are perennial tyre-kickers and rarely get up to this point. Once you are satisfied with the business and you have the finance in place you should make an offer for the business. This is normally done by phone or through your agent if you have instructed one. The offer should be followed up by a letter of intent and if this is accepted, you should be given assurances that vendor is solely negotiating with you. Following this you should be given access to the company's financial records and the formal due diligence process can begin.

Have your lawyers and accountants go over the details and while this is done, discuss the terms of the sale with the vendor. The terms of the deal are very important and it's a point that often leads to disagreements between buyer and seller. Although you need to maintain a good relationship with the seller especially if you need work with them post-sale, you should not be afraid to drive a hard bargain

It's a buyer's market right now so as a motivated buyer with the available finance you are in the driving seat. Make sure you push for the best possible deal and if negotiating is not one of your strong points then instruct a professional intermediary to help you

10. Buy the business

Once the final terms of the sale has been it is time to sign the sale agreement. This is the final contract which details the price, the terms agreed and any conditions or clauses you insisted on during negotiations. Once this is signed you are the proud owner of a business and then the hard work really starts.

If you are interested in buying or selling a business visit today.

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