What questions to ask when buying a business?
Businesses are bought for various reasons. An established business may acquire a competitor for market expansion. An individual family may buy a local small business to be their own boss. A private equity investor may invest their money to buy shares into a private business for above-average returns. What ever the nature of acquisition, the process of buying a business can be very lengthy, tedious, and expensive.
Whether an established business, an entrepreneur, or an investor, every buyer should ask the following questions before buying any business.
- Is this the right business?
- What is a good price to pay for this business?
- Are we getting everything we are being told?
- Are there any legal liabilities and legal risks we do not yet know?
How to see if it is the right business?
Every buyer has different reasons for buying a business. Which ever kind of buyer you are, it is important to find out if this is the right business for you, i.e., it helps you get to your goal.
For a family buying a local small business, the main goal is to become your own boss with stable earnings for the long run. To see if this is the right business, it should be able to meet your lifestyle and working habits, be able to provide stable earnings, and give you the time to enjoy your life.
For an established business, the main goal is to expand the current business harmoniously to increase its market share and net profits. To achieve the right fit, both the businesses should have similar strategic goals, streamlined daily operations, and similar working cultures.
For a business investor, the main goal is to earn more than average return on their investment primarily because of the risk profile of investing into a private business. To achieve this goal, the investor should understand the business no less than a pro, the business’s market should have future earning stability, and the business should have honest, committed, and competent management who can keep performing in the future.
How to find the right price?
If history and past performance was all there was to the game, the richest people would be librarians…. Warren Buffet
No business has a fixed price. There are various valuation methods which calculate a value of a business from very different methods. However, most methods calculate the value of a business based on past performance. It is important to remember that although past performance is a good indicator of the quality of a business, it does not in any way guarantee future performance.
We believe that the right value of a business primarily depends on the size of its profits, the consistency of its profits, and the sustainability of its profits generated in the long run. Hence our valuation method is different than normal convention. To value a business we analyze past performance along with its viability to keep performing in future. We forensically analyze past years financial statements of the business to calculate accurate profit figures, and conduct a detailed strategic analysis and market study to judge the earning potential of the business in the future.
How to get everything else right?
A famous business investor, Warren Buffet, famously says ” Risk comes from not knowing what you’re doing”.
Successful investing requires knowing everything about the business, which essentially needs detailed business knowledge, sharp insight, and extensive business experience. Knowledge can be learned from books but insight and experience comes with time. To get everything right in a business acquisition, you need to work with the right team of people who can bring together their knowledge, expertise, and insight from all aspects to help you know what you do not know.
How can we help?
We at Compendium Nancial will help you through the process of your business acquisition. We have the experience, the knowledge, and the insight to help you succeed in your acquisition. Having experienced various businesses, we will help you:
- Understand the strategic and operational fit of the business with your current needs and future goals;
- Forensically analyze the financial statements of the business to find its proper value based on its earnings power;
- Find out what exactly will you get when you will buy the business;
- Cover all risk aspects, legal and non legal, of the acquisition deal and the business; And
- Bring together the right team of people for you to leverage your knowledge and understanding.
Contact us today for a free consultation on how to buy the right business at the right value and cover all your legal liabilities in the most effective and efficient way possible.