Starting a business from scratch is not that easy. You need to deal with building your customer base, marketing your new business , hiring your staff, establishing your cash flow the list goes on. There are endless tasks and high risks, not to mention the time you need to wait for your investment and hard work to pay off…
...which is the total opposite of buying an existing business.
Purchasing a business for sale is easier, faster and less risky than starting from scratch. When you buy a business, you simply take over and continue its operation. As long as you are making a wise purchase decision, it should already have an established brand, customer base, and cash flow.
But before you get excited with the benefits of acquiring an existing business, you need to know where to start, what to do, and be aware of the whole process. You need to be warned that the whole process can be exhausting and heart-wrenching.
As trusted business advisors and chartered accountants in Auckland, we make sure that our clients know what they are getting themselves into. We take them through and help them consider the following issues:
It is a CRITICAL investment decision
No one should go ahead and buy a business without evaluating if it is a 'good deal'. You are investing big money, so you should know if there will be an adequate return considering the nature of the business and the degree of risk involved.
We often advise our clients to invest an hour with us so we can introduce them to the methodology we use in evaluating business opportunities. We discuss and provide them examples to assess the real and the future value of the business being sold. We also take time to answer any questions they may have. We do this to help them make the best investment decision.
It is a DUE DILIGENCE process
Buying an existing business is a time consuming process. You will be required to schedule appointments with various advisors and with other people involved in the deal. Often these are given with little notice. This will be a time of great uncertainty, so you have to be patient and cool during the whole negotiation process.
Chances of success
You need to be aware that 80% of businesses fail within the first 5 years. So you need to be brave and extra patient. On the other hand, if the existing business you are purchasing has good systems and does not rely too heavily on the outgoing owner, you are more likely to be successful.
The need for adequate working capital to get started
You will require access to ready capital for six or more weeks after buying the business. This capital is to pay for the due diligence process, set up costs, stationery, marketing, etc. While you are waiting for your cash to flow, you should have enough funds to support your personal living needs.
Be clear about what you are buying
Is it shares in an existing company? Or is it the whole business? A business consists of many components. The vendor should be clear about all the things that they are selling to you. We recommend that fixed assets with their corresponding amounts are listed in detail.
Evaluate carefully the business
Some of the most commonly overlooked items when buying a business include: depreciation of fixed assets, interest costs, leasing expense, and wages for working proprietors.
These are just some of the most important things that you need to know when looking to buy a business. To find out more or for assistance with a due diligence process, call us on (09) 576 4166 or request an appointment online
Next week, we will be discussing the cost and other expenses involved in buying a business that you need to know.
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