Factors to consider when buying a business
Q
AI am thinking about buying a business, What are the key factors I need to consider? ONE way to achieve growth for your business is to buy another business. A big mistake that many in this position make is to look for opportunities at the lowest price. But price is only one of a number of factors that must be carefully considered. Failing to consider other factors is likely to make it much more difficult for you to be successful in your purchase. WHAT FUNDS HAVE YOU AVAILABLE TO COMMIT?
The answer to this question will dictate the amount of funds you’ll be able to get from other investors and finance providers. This is because their assessment of the risk of the venture will be linked to the amount of financial commitment they see coming from you. They figure that the more you put in, the more committed you’ll be and so the more likely that the venture will be successful. Trying to buy a business for €2,500,000 when you’re investing €100,000 is going to be extremely hard to achieve. Whereas if you’re looking at one in a €200,000 – €300,000 price range you’re more likely to be successful in getting finance. DUE DILIGENCE ESSENTIAL
It is absolutely vital that proper due diligence is carried out before buying a company or business. Depending on the size and complexity of the target business it may be necessary to carry out due diligence under the following heads (this is not an exhaustive list): Insurance, Legal, Accounting, Environmental, Statutory obligations (CRO obligations included), Title, Taxation Other critical issues to be dealt may include:
Warranties (statements given by the vendor to the buyer in relation to the business being acquired). Warranties would normally cover matters such as the target companies accounts, pending litigation, taxation, employees, assets, liabilities and essentially all aspects of the companies affairs.
Disclosure letter ( a letter from the vendor to the purchaser which sets out where the target company has any issues in relation to the general warranties already provided).
This might include any problems the target company/business has in relation to employees, title to property, insurance, banking facilities and any number of other areas where the actual position on the ground deviates from the warranties given in the agreement to sell. HOW MUCH HELP WILL YOU NEED AFTER THE PURCHASE?
If you’re taking over another business there will be a huge amount of knowledge that goes into running that business. For instance, there will be relationships with customers and suppliers as well as knowledge of marketing and how the industry works.
Do you have that knowledge already? Quite likely you’ ll benefit from some continuing input from the seller. This is where it becomes important not to be fixated on negotiating the lowest price. WHAT ARE YOUR PLANS FOR THE NEW BUSINESS?
When you’re buying a business you need to consider what you’re going to do with it and where you see it going. This is important to have in mind during the buying process because it will affect how you structure the finance. Jim Doyle ACMA QFA CGMA is a partner in RDA Accountants, offering full accountancy, business advisory, tax advisory and financial services
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