6 Principles to Consider While Buying a Business
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Russell L. Brown, author of the famous book, Strategies for Successfully Buying or Selling a Business, says he has worked with many business sellers and many more potential business buyers over the years. According to him, it is never easy getting a deal accomplished! “I strongly believe and firmly advocate that the best way for an entrepreneur to successfully get into a business or expand what they already have - is to buy an existing profitable company. But there are many obstacles and pitfalls along the way that must be overcome. It really is a jungle out there!” he warns.
From due diligence to negotiating the right price, if you’re considering buying a business make sure to follow these top tips before you make an offer
Entrepreneurs today are opting for acquiring existing businesses in order to grow. This idea is also fuelled by the fact that banks are now offering attractive schemes for acquisition lending. Besides, the fact always remains that starting something from scratch has its share of serious struggles. Acquiring an existing business is as thrilling for new-age entrepreneurs as starting a start-up.
However, while going to acquire a business, it is important to consider the following principals-
Get Professional Advice
Get yourself a coterie of lawyers, accountants and surveyors – before going to buy a business. “This is vital as these are the people who will assist you with contracts, negotiations, and also with the latent issues regarding the company’s finances or real-estate. Many may think that they can do it themselves; however, a professional opinion is very useful,” shared Anuj Gupta, CEO and Founder, Adda52.
What’s a business worth?
The value of a business is determined by considering many factors, including strategic essentials outside of the practical. “But above all, one must focus on the company’s capacity to produce net profits. If the potential business is not generating decent earnings and the ways to change that is not very evident, don’t buy it,” advised Kanika Tekriwal, Founder, Jetsetgo.
Ignore Businesses with Unreported Incomes
If the seller mentions about unreported incomes from the business to rationalize the selling price, stop pursuing this seller immediately. It’s not sensible to go for a business that breaks the law and then tries to do business with it.
Do Comprehensive Due Diligence
Do everything to find out about the company’s insurance claims over the past few years. “Also be careful to inquire about the outstanding cases, if any. All financial statements from the past years should also be reviewed. This includes declarations of cash assets, outstanding loans or debts and intellectual property rights,” advocated Ankit Singh, Co-Founder Mypoolin.
Beware the Desperate Seller
Unless faced with imminent death, sickness, disability – a seller anxious to sell his business is likely to have distressed state of affairs. “Though this could mean attaining a lifetime fortune, often it has been seen to manifest in a sorry state where the buyer realises that the sale price does not match the performance of the company,” opined Laxman Jaiswal, Chairman cum Managing Director, Ascon Infrastructure (India) Limited.
Precedence says that in such cases the owner is often found to be in need of solving his financial problems through the deal. In doing so he fixes the selling price on the size of his ordeal instead of the actual value of the business.
Don’t bring Lawyers in too Soon
A lawyer is an intrinsic part of any business deal. However, introducing them too early in the scene can create unnecessary panic and unease. Attorneys are like medicines – Though they can save you, the dosage must be administered with caution.
Write this on a wall- while going to acquire a business, information and data, following a methodical process and patience are your key.