Although it is common for businesses to change hands frequently, the process of finding the right business to buy is quite daunting. Every year thousands of businesses are involved in mergers and acquisitions. Those involved mostly include small businesses. With their struggle to manage cash flows, not all are fortunate to seek financing.
If you plan to purchase a business, here are a few aspects to consider.
The picture shown above states the probability of selling a business compared to the number of employees the business has. As the employees increase, the probability of selling increases.
1. Verify the financial record of the business
Before plunging in and trying to seal the deal, it is important to check the financial performance of the business you plan to buy. Closely follow the progress of the inventory, balance sheet, and the financial statement before taking any decision.
If the business fails to disclose the details due to some financial problem, it would be a problem for you if you buy the business.
Often, buyers fail to realize the importance of book value and return on investment. If ROI is low, you are better of investing your money somewhere else, therefore, it is important to know if the deal is worth it, instead of buying the business.
2. Tally the legal documents
When analyzing the legal documents, it is essential to verify contracts such as, lease and purchase agreements, sales contract, and other instruments that are used to legally acquire the company. If you are purchasing a business with a valuable intellectual property, it is better if an attorney evaluates all the agreements to avoid any lawsuit in the future.
If the business fails to provide any legal document, you may be fined if caught while the previous owner will not face any consequences.
3. Determining a fair price
Reaching a deal and agreeing on a price is an exhaustive process and emotionally taxing for both the buyer and seller. Price depends on various factors such as, economic conditions, motivation levels, etc. Generally, prices are high during the expansion of the economy but drop during recession.
You can also buy a business at a discount deal by playing the waiting game. On the other hand, don’t let the seller know how much you want the business which could adversely affect the price levels.
The graph above shows the confidence of business owners with respect to political environment in the US. It depicts that most of the buyers are confident.
4. How to avoid mistakes
Do not be anxious at the time of conducting the deal. When in doubt, call a consultant who can do the dealing for you with a clear mind. Some of the common mistakes that buyers make are using up all their cash in the down payment or purchasing all the receivables or being too blunt with the seller.
If we try to think with a clear mind, we can use all these scenarios to our advantage and reach a low cash deal with the owner.
The bottom line
Changing hands in a business requires reorganization of a company. If the business you’ve acquired is declining, you can apply receivable Financing for your small business or restructure the management strategies to make it a formidable company in the marketplace.