So you think you have found a gem, but before you buy a business slow down. It may seem perfect from the outside, but these are essential questions to ask before you sign.
Have you done a deep analysis of the financial records?
As a potential buyer, you need to see at least the last three year’s worth of financial records, including profit and loss statements, tax returns, purchase and sales documents, balance sheets, and of course, the bank statements.
The financials can see the viability of the business. You need to check growth potential as well as any potential issues that the company may foresee.
If audited financials are not available, check that a reputable company does the compilation they provide you.
Have you done a full tax implication assessment?
Ensure you are aware of the Security Transfer Tax you are liable for when you buy an existing business or shares. They are to be paid by the purchaser. You will need to add these costs to the overall purchase price of the company.
What is in it for the seller?
For most businesses, an exit strategy is rarely planned nor desired. Please find out the real reasons that they want to sell. Ensure you do due diligence on the business to see if they are not telling you why they want to sell. When you buy the business, you don’t want any surprises.
Who is currently in charge?
Who is part of their current team, who is the boss, managers, and staff? What are their roles, and are they part of the deal? You also need to assess what would happen if they had to leave with the seller or what you are in for if you don’t get along with them.
You take over the employment contracts, so do a deep dive into this before deciding on that number you want to pay.
Is there a competitive advantage?
What is unique about this business? If you are another “me too” company in the market, you may need to rethink the purchase. Anyone can replicate products, but personal service is a skill that will keep customers coming back even with a change of ownership.
Is it on a positive incline?
Are the revenue and profits on the rise? You do not want to invest in a failing business unless you can see where you can improve the basics like efficiencies or sales.
Check the business’ net profits and ensure you have a full grip on any liabilities you may be liable for.
Is there a lot of debt in the business?
You can establish the company’s debt with a debt-to-equity ratio. You need to ensure that your buying company can service its debt and reduce your risk overall.
What are the delivery and payment terms for suppliers?
Working capital and cash flow can sink a business if you are not on top of the delivery and payment deals in place. Of course, you can enter into new negotiations, but make sure you can manage the profit and loss with the current terms in place.
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