Checklist for Buying an Existing Business

Pros of Buying a Business

There are countless benefits, but to name a few big ones:

• Easier to acquire funding as there is proven cash flow.
• Reduced risk as the business is already running and generating cash.
• You gain existing customers/clients.
• You gain an existing platform to grow from.
• There is a history of the business you can learn from.

The Checklist:

So you’re looking to buy a business? Here’s everything you need to review and the questions you need to answer before you do.

Staff 

Your employees are the driving force who allow a business to operate. Without them, no wheels would be turning. 

Qs to answer:

What is the stability of the workplace/are they happy?

Is there a high staff turnover?

Are they skilled and properly trained?

Are any near retirement?

What is in their contracts that you may have to replicate?

How is their accrued leave being managed?

Clients/Customers

These guys are the ones feeding money into your business and helping it keep financially afloat. So assessing the current climate of clients/customers belonging to the business is crucial. 

Qs to answer:

What is the company’s relationship status with its clients/customers?

Is the business reliant on one or two major clients/customers? 

If so, are there contracts in place with them?

Will you get formal introductions? 

Goodwill

This is the value of a business’ name and reputation. Because goodwill can affect a business dramatically, it’s important to examine its current status.

Qs to answer:

What is the business’ reputation? 

What feedback has it received on social media/digital? 

Will all the clients/customers stay once the current owner departs?

Can you speak with clients/customers to hear their thoughts on the business?

Are there any court cases or legal disputes that are pending or historical?

Marketplace and Competition

You will need to analyse the current condition of the industry that the business is in. This, as well as identify all competitors and their advantages. 

Qs to answer:

What’s happening in the industry? 

Are there any major changes or impacts on the horizon? 

Who are your competitors and how will you compete? 

Have you spoken with an ex-pat of the industry for experienced advice?

Suppliers

If the business requires a supplier (and it likely will), you must learn the ins and outs of its current supply situation.

Qs to answer:

What is the status of the business’ current supply?

Are there any issues with getting the product/service required ongoing? 

Is there a good relationship with suppliers? 

Are there contracts in place? 

If so, what are their financial terms?

Financials

For a business to succeed it needs excellent management of financials. For this analysis, you will need access to the last few years of financial statements for the business. 

Qs to answer:

Is there any trend/seasonality in profit?

What are the known causes of profit spikes and losses? 

How does the gross profit compare to its industry standard?

Stock/Assets

It’s easy for stock to be mismanaged as much as it is to assume that assets required are company-owned. To avoid getting caught in a financial crisis, you need to assess both.

Q’s regarding stock:

What will be your upfront costs for stock?

How long before the cash comes in?

How often do they stocktake/will you re-stocktake yourself?

Q’s regarding assets:

What property/equipment/vehicles/intellectual property does the business own? 

Will any assets require upgrading?

What will you need to purchase?

Lease

If the business is leasing property/sites, you will need to closely examine the lease agreement. It’s possible that current contracts might delay or change your plans for business development.

Qs to answer:

How long is the lease term?

What is the payment?

What is included in the lease?

Is there 24/7 maintenance in case of emergency?

Contract

Come time to look at the contract, you must use professional help. This is the only way to ensure everything you expect to buy (including intellectual property rights) is written in the contract.

It’s also smart to consider including a restraint of trade clause to protect you against the current owner setting up in competition.

Franchise

If you’re buying into a franchise, you will also need the assistance of a Franchise Specialist. They will be able to point out any restrictive clauses in your agreements which reduce your ability to change and develop the business. 

And because franchises will also take a percentage of your cash flow, a specialist will help you ensure they’re contractually obliged to deliver the services/support you’re paying for.

Utilising The Checklist

The information you will gather from ticking off this checklist is invaluable for building an effective business plan and cash flow forecast. Both of these will be necessary for your funding application but will also help you make your buying decision. So don’t skip any of the details!