The answers to the above question is a definite Yes!
Buying a business is a process and therefore it requires a certain procedure to be followed. There are several elements that demand attention for both the parties involved in the deal i.e. the seller and the buyer. Above all these elements the price of the business is considered the most important as it’s the basis for deciding the further course of action.
People often get confused between franchise and buying a business. These two are very different terms. When a business is taken on franchise the liabilities and the assets doesn’t get transferred to the buyer from the business holder whereas its completely opposite in case of buying a business. Buying a business takes place when a company or a business is undergoing mergers or acquisitions. For an individual or a group of individuals who are new entrants into the competitive market it is always advisable to start by purchasing an existing one.
As mentioned earlier that buying a business is a process; prior assessments are mandatory and if they aren’t being followed by the buyer then the beginning point isn’t good at all. It is always better to plan your actions beforehand and thereby not landing into difficulties which might have occurred if the decisions were taken hastily. So, below mentioned are some important points that every buyer must keep in mind to carry out the process flawlessly and enjoy the after benefits easily.
Seller’s Motive of Selling the Business:
As and when an individual decides to buy a business, he or she must firstly enquire to the seller about the reasons that are forcing him to sell the business. Its important to know this fact initially, to avoid further glitches that may arise if some unknown facts pop up afterwards. The reasons if are in favour to the buyer’s intentions are considered as favourable and they are like: if the seller wants to retire from the position, he is unwilling to continue despite the business is yielding profits, etc.
Sales capacity of the business:
Analysing the sales capacity of the business is helpful to assess the future gains and also it’s the major element among various in decision making process. The reason for the same is that any business is purchased anticipating future gains and expansion capacity and if these two exists, a positive decision can be taken ahead if other domains are good too. This can be done by interpreting the financial statements of the company like balance sheet, cash flow statement, profit and loss statement.
Speed of financial gains:
Financial gains are nothing but the profits tat business is generating. A continuous and efficient increase in profits due to operational activities indicates that the business is flourishing and it’s a good point to buy any business. It also gives a kind of satisfaction to the buyer that the business will continue to grow in the future as well.
Legal Aspect of the business:
Legal aspects include the legal documents and agreements of the business with its stakeholders. The buyer must scrutinize all the documents very carefully to avoid any unfavourable situation in the future operations as well to make the buying agreement authentic and inclusive of all the clauses. The agreements with the stakeholders can be salary or wages agreements, suppliers’ agreements, customer details, etc.
Outstanding liabilities refers to the debt the company has to pay till date. The buyer of the business has to make sure that every liability must be looked in detail so as to know that how the company is still liable as it suggests the financial health of the business. If the company posses a good health, the outstanding liabilities will be lesser and vice versa.
Business setup means the business framework. A business which has adequate and relevant steps of procedure will be easy to handle comparatively to the one which lacks the same. Business setup means on what grounds the business ahs been structured and how does it function. A business with complex or unknown setup will result into inefficiency in working in the future.
The buyer of the business must find out whether the busines is owned by only one individual or the nature of the business is partnership. If the buyer finds it t be of partnership type of business, it must be ensured that all the partners are known about the selling of the business and they are exiting the ownership position too.
Before stepping into the buying stage, the buyer must be completely aware of the nature and type of business he wants to purchase because if he goes on to purchase a well-established business and lacks the required skills
Knowing the stakeholders:
Stakeholder include all the people who are attached with the business operation like the employees, customers, suppliers, etc. Buyer must have the knowledge about each and every stakeholder. He must know what are their terms of operating, what type of customers are there, how may employees the business has, how are they being paid, what are the credit rules in respect to suppliers, where are these suppliers located, etc.
Tax system must be adequate in every business. A good tax indicates prosperity of the business and it helps in knowing the legal implications also. The buyer can assess the future tax incidence depending on the previous year figures depicted in the financial statements.
Knowing the inventory system is very crucial in the beginning as it indicates the sales process, and also the turnover of inventory which helps in assessing the procedure that the business follows. A higher inventory turnover is a good symbol and the decision gets a green signal from this aspect.
Business assets are extremely important in assessing the business value. Assets are shown at depreciated amount in the balance sheet and therefore, they must be seen if they exist or not and what is their condition is taken for resale. The current asset especially the cash and bank balance must be looked upon to know the liquidity of the business. This will also help the buyer in assessing the working capital requirement of the business.
Product/ Service Feedback:
Customers must be enquired by the buyer to find out their reviews about the product or service. A good review will make the buyer confident about the goodwill of the business and he can assume the same in the near future also. Goodwill of the business helps the business to sustain in the longer run.
Having sufficient knowledge about the business buying process saves the buyer from any future mishappening and also helps in taking the most efficient possible. Since both the parties will want the deal to be in their respective favour, getting desirable points in the agreement will benefit the buyer not only in the momentary phase but also in the long run.
About the author:
Mervyn Aranha is a Business Analyst - Transactions at Kapso Business Services, India’s Leading Business Brokerage firm.