6 Helpful Tips for Buying a Small Business

This week we have another guest blog – not sponsored, from Faye at www.businessforsale.com for those who may be curious about buying a business. I hope these simple and practical tips are helpful for you. Kelly @ My Sassy Business

Deciding to branch off on your own and buy a small business can be quite daunting and a bit tricky. There are a variety of factors, steps, and challenges that you will encounter, so the more prepared you are, the better! You will need to conduct thorough research and detailed due diligence in order to ensure the entire process goes as smoothly as possible.

Let’s take a peek at a few helpful tips to guide you on your journey towards becoming a satisfied business owner:

Consider the pros and cons

Once you’ve set your sights on the business you want to buy, you’ll want to verify the state of that business before making an offer. Sit down and make a list of all the advantages and disadvantages attached to the existing small business. This will involve a critical analysis of any current arrangements the business has, which may include the following:

  • Location
  • Staff and agreements
  • Current pricing
  • Inventory and equipment
  • Existing leases, mortgage, and other financial arrangements
  • Business image and reputation
  • Relationship with suppliers and distributors
  • Consumer satisfaction and loyalty
  • Marketing strategies – both past & current
  • Additional agreements
  • Past or current disputes

There might be other factors specific to the small business or industry you are buying into, but this list will help you get started.

Establish your credibility

It’s not uncommon for sellers to only entertain offers from pre-qualified buyers. Being pre-qualified ultimately gives you more buying power. If you have already secured the financing for your business venture, you can make an offer with more confidence and credibility.

Once you’re pre-qualified, you can formally register your interest in buying the business. Often times, the owner will have instructed a business adviser, such as a business broker, lawyer, or accountant, to sell the business. Approach the advisers, rather than the owner, to register your interest. Your integrity and your future plans for the business are usually extremely important to the seller.

Determine the seller’s intent

Before you jump in and make an offer, complete preliminary due diligence of the business and find out why the owner wants to sell. Most of the time it’s as simple as retiring or wanting a lifestyle change. You just want to make sure there isn’t a hidden reason the seller is trying to “get rid” of the business.

Sellers can often attempt to evade the weaker areas of the business or create short-term gains to give a more favourable impression, so be patient, take your time, and investigate the business thoroughly before you show any buying interest.

Here are three key questions to ask the seller:

  • Do they have to sell, and if so, why?
  • Do they wish to sell just the trading part of the business, or are they also selling assets (such as a building) in addition to the trading part?
  • Is money the prime motivation for selling, or is there some unrevealed reason, such as a competitor planning to open nearby?

If you can uncover the seller’s motivation, you’ll gain an advantage in the negotiation process. If the owner has to sell within a certain time period, then you may be able to negotiate a lower price.

Educate yourself

This should go without saying, but it’s probably worth reiterating: Research the market of your potential business and its main competitors. In addition, assess the risks associated with the business’s future trading and with the industry as a whole. It also helps to chat with existing customers as well as suppliers to gain additional knowledge and insight. If location plays a key role, stand out of view outside on various days and at differing times to get a better idea of overall traffic flow.

Another great source of information is industry experts. Ask them the following questions:

  • What’s the current and future demand for the products or services of that business?
  • Are prices (and margins) rising or falling?
  • How is the competition in that market changing? For example, which new competitors are entering, or who else is looking to exit?

Finally, contact the relevant industry association if there is one. For example, if you’re interested in a retail business, talk to your states retailing association.

Make an offer

Finally, you’ve done the research and completed thorough due diligence, and now you’re ready to make an offer This is a perfect time to obtain professional advice because accurately valuing a business is key before you make an initial offer.

Though it sounds obvious, making a lower offer and increasing it if required is always a better strategy than going in high at the start. Ultimately, the business is only worth what someone is willing to pay for it. The seller might have to lower their expectations. One note of caution, however: Be sure that any lower offers you do make are well within the market value of the business. Otherwise, you run the risk of offending the seller and having them walk away from the sale entirely.

A business owner will want to sell their business for as much money as possible, and you’ll want to pay as little as possible. The key is to find the balance and make the seller want to sell the business to you—on your terms and at your price.

Negotiate goodwill

Goodwill is an amount the seller might expect from you for the value of the business’s intangible assets such as its established brand, loyal customers, high profit, quality staff, good location, long lease, or supportive suppliers.

It’s strongly suggested to get advice from your accountant on the best way to deal with goodwill. An expert will help guide you in ways to negotiate a lower price if at all possible.

As mentioned above, this is just a peek into some of the steps you will need to take when buying a business. If you’re feeling wary about how to start, seek the help of experts in the brokerage field to assist you as you navigate through this exciting but somewhat unnerving process. Above all, don’t lose sight of your passion and motivation to achieve your goals as an owner of a successful and thriving business.

Faye Ferris is the APAC Sales and Marketing Director for BusinessesForSale.com, one of the world’s largest online global marketplaces for buying and selling small to medium-sized businesses. Faye is passionate about helping Australian small businesses succeed and regularly writes about entrepreneurship and business management.