Acquiring your first business will be a lengthy and detailed process that requires a lot of research and contemplation before you can actually go ahead with the decision to risk all your hard earned money on any venture that poses many uncertainties.
Here are some factors worth consideration when acquiring your first business.
Determine The Kind Of Business You Want To Acquire
You must clearly determine what sort of business or market you wish to enter. This entails asking yourself questions like ‘what do I want to buy?’ and ‘where should I start looking?’ You must engage in extensive research to answer these questions. Even if you have an idea of what you want, explore all possible alternatives to ensure that the one you finally decide on is, in fact, the right one. Each trade has its own set of pros and cons; you might want to consider all economic, political, sociological, technological and legal restrictions/legislations that affect business practices in certain markets.
Look up facts and figures (such as market size, growth, and gaps) and recent developments in the market you are going to enter. Get an idea of the reputation of the company you are about to acquire. Also, determine the personal impact the business will have on your lifestyle in terms of effort required, the level of involvement, flexibility, and volatility in income.
Get As Much Information As Possible
This means ensuring the business you’re about to acquire is indeed what it claims to be; there are a lot of scammers and swindlers out there. Make sure to check the memorandum of the company to get an overview of its formation, policies, and operations. Get access to the company’s financial records to determine its costs of operation and credit rating. It is recommended that you hire an accountant to help you see through window dressed accounts. Research the local area to make sure there are no legal issues that might threaten future activity. If you’re thinking of buying a service company, put yourself in the customers’ shoes and evaluate the quality of the service being provided and determine if and how it can be improved. You might also want to gain insight into why the business is being sold; is it because the current owner wants to retire, or is the business suffering from a series of negative revenues? It will be extremely useful to verify that there are no hidden reasons for selling the business.
Determine The Value Of The Company
There are several valuation methods at your disposal, each respective to specific kinds of companies. Since this is your first company we’re talking about, a surveyor report is a good start. However, you must obtain detailed information about the company’s revenues, cash flows and asset valuations for a comprehensive understanding of its position. Check for all other liabilities including tax, superannuation, and lease. You will also need to consider any goodwill or intellectual property involved. ‘Multiple of earning’ is a simple yet crude way to determine a company’s worth; this means that if the company is currently earning $100,000, you can take a multiple of future profits to determine a price, say somewhere between $300,000 to $800,000. Usually, anything between three to eight times the current profits is deemed appropriate. However, this rule does not apply so smoothly to all businesses. In the final analysis (also taking into consideration other bidders), the ultimate worth of a business is dependent on how much you’re willing to pay for it.
Determine How You Will Pay For The Business
There are several ways you can structure payment for the acquisition. You can opt for seller financing or seek financial assistance from banks (if your desired acquisition is financeable). In most cases, you are required to make a down payment of 20% of the purchase price; you must make arrangements in advance to acquire this amount. Discuss other options available for financing with business brokers, lenders, and other financial institutions to make a completely informed decision that best suits your purpose.
The surer you are about your business, the easier it is to convince lenders of its viability and therefore negotiate for better deals. Also, it is important that you shortlist major lenders down to just one or two major targets and a couple of backups. An asset sale, as opposed to a stock sale, can protect you from liabilities incurred by the business prior to purchase.
Buying The Company
There are essentially two ways of buying a business; look for ones that are on sale or approach the ones you wish to buy. Be sure to thoroughly assess all the opportunities available to you in and consult your business advisor before making a final decision. As a rule of thumb, always enter into a contract with the seller so that there are no misunderstandings between the two of you once the deal is completed. Also, use an advisor to make the first approach on price; this will allow you room to negotiate the price or make a counter offer.