Due Diligence For Buying A Business

By: NJK
Facts You Should Know About Buying A Business!

Written by Martin Mac Anally

The value of a business will be different for different buyers and for different reasons. A science it is not, but a subjective investigation of financial and non-financial aspects of operations is more on the money. It is not like any other investment you will make and whether the business is run under management or as an owner operator it will consume some or in many cases, most of your energy during the day and at night (if you let it). The big questions that always come out of the review process are,

am I paying the right price?
what will be my return on investment (ROI)?
will the bank loan me the necessary funds to allow me to succeed?
Some people will buy a business that they have little or no experience in, but they excel in marketing/sales and are system builders. Over time their experience and skills, will constantly improve the net profits, to a stage where they on-sell the business and search for another business opportunity and repeat their successful money making formula.

Others will buy a business that they are experienced in, either from their employer or a market vendor, fully aware of the current operation.

Most likely they could already have rapport with the existing client base, they know what these people want, the expected margins and sell price. It’s marvellous the difference enthusiasm can make to an old, tired, operation. These new owners could even bring experienced staff with them.

All businesses have their own unique level of Risk. A low risk example is an Australian Post Office agency (defined demographic area, barriers to entry via a license with Australia Post) the ROI could range between 22. At the other end of the scale could be a newly established business that supplies services or finished product to the building or resource sectors. This example would equate to a high risk (price conscious, competitive market with tighter margins, the ROI could range between 60).The old adage, the higher the risk the higher the return has proven itself countless times.

So what price should you pay and what will be my Return on Investment? (ROI). This is where you must do your homework. Does the business under review meet your Selection Criteria? So your first task is to make this list. Then, see your financier to get advice on the price range you can afford. Ask yourself

Why am I doing this?
What’s my goal here?
What outcome do I hope to achieve here?
Will this enterprise earn me more that just wages considering the risks that I’ve put on the line?
If it’s a profitable well-run business with systems and procedures in place with an acceptable ROI, it will always sell before an overpriced operation. Our economy with its low interest rates and with a good number of businesses in the marketplace makes it an opportune time to start the review process.

The key to the “buying" process hinges around the Valuation and the Due Diligence clauses within the contract. As you can see there is a lot involved, it takes time, and the process MUST sort the chaff from the oats. If not, move onto the next one, as you are generally putting a lot on the line, possibly your home and relationships.

My tip, ask the hard questions and expect clear answers before any contract goes “unconditional".

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