Finding the right business to buy

You have found something that looks interesting, and fits your criteria...

It's important to ask the right questions when you find a business to buy: Is it in a growing or declining market, at what stage is its business cycle, is it well located and operated, does it have good systems and resources, and does it have the potential you want? Look at the financials - are they healthy? Do you have a vision for where you could take this business? Is it you - does it fit your profile? The more work done here prior to making an offer, the greater the savings on fees.

The first step is to carry out a preliminary investigation. This is no substitution for conducting a full due diligence on a business, but will assist in determining if you are on the right track and if it could be the right business to buy.

The following sections will help you in your evaluation:

The Market Place and Business Image - Established businesses will have an accepted and well-defined product or service. Where is this positioned in the market place? Is it a niche product or service, what is unique about what is on offer, and how strong is its position in the market? Image and market position are non-tangibles that take time to establish - their value will be accounted for in the goodwill. Is the product or service technology based, or threatened by technology? Where is it in it's life cycle, is it a mature product or service in a declining market? How are you going to reposition or build this to attract more custom - have you budgeted for this? Is the company well perceived - ask about, but preserve any confidentiality? How does the company treat it's customers, deliver on promises, even answer it's phone. A poorly perceived business holds little value - this should be reflected in the goodwill.

Reason for Selling - So you're asking yourself, if this business is so good, then why is it for sale? There are obviously some very legitimate reasons for this; the owner is retiring, illness, loss of interest and wants a change, partnership break-ups (business and domestic). There could be other reasons to look for; a declining market, obsolete products or services (or about to become so), changing traffic patterns or new competition and can't compete, short-term leases or franchise agreements that may not be renewed, and lack of working capital? It can sometimes take some probing to get to the bottom of this.

Financial Status - Look at the financial statements from the past 3-5 years to judge its current health and financial trends - do they make sense? Is the business in a sound financial condition? Are the sales and operating ratios in line with the industry averages? Your accountant or business advisor can help you analysis these figures and assist in determining if they are asking a fair and realistic market price. From the financials you can quickly assess the business's return on investment, and it's reward for owner's effort.

It's Employees - Experienced and skilled staff are an important asset to any business. They usually know the business well and can be key in managing both the operation and it's customers. You need to determine how and which employees are crucial to the success of the business, are they people you can work with? You may need to provide key players an incentive to stay - if they left could they be easily replaced? Would any customers follow them? Are they well managed and motivated?

It's Customers - Securing new customers and clients can be very expensive. In buying an existing business, these are a vital component. Make sure they're as solid as the other tangible assets you'll be acquiring. Check to see if the current owner has any special relationships with the clientele - would their custom continue in the current owners absence? What are the number of active accounts held, and where does most of the revenue come from - would the business be at risk if one or two of the larger accounts were lost? Is there a good relationship with the customers? Talk to some customers about the business, what do they like and dislike? (Check with the owner first)

Location and Condition - If you are buying a retail business location is very important. How good is it, and how important is this in contributing to the success of the business? Is there sufficient parking, or does it depend on walk-in trade? What about future developments in the area - ask about, and check out town planning. Is the building appropriate, is its lease and terms reasonable - will your new business be secure? What about the conditions in which a business operates? Are they safe and pleasant, how does it feel when you walk in there? Is the building well maintained and ready for business? What about the plant (the tangibles to the purchase) - is it suitable, modern, and or in good working condition?

The Competition - There are always competitors. Who are they, and what's the competitive environment under which this business operates? Talk to knowledgeable people with experience in this industry. Check out industry trends, and how these might affect this business. Have any similar operations gone out of business recently and why?

Ready to Proceed - So you have the vision - the business fits your profile, and with its systems, products and services, it has the potential you want. Having done your preliminary assessment you are now keen to proceed. Now is the time for some in-depth analysis, for determining what the business is worth to you prior to making your offer. Use professionals to help in the business buying process to ensure you get it right.

By Richard O'Brien - nzbizbuysell
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For further information, visit: NZ Businesses for Sale online.

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