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Buying a business: think before you close the deal

skeleton closet cupboard due diligence

Buying a business for sale can be an extremely positive step towards a brighter future.

Oftentimes, it can be a safer alternative to starting a company from the ground up. 

An established business can come with a steady customer base, a solid reputation and proven financial success. 

However, hypothetically you could get the exact opposite. 

There are things you should always ask yourself before sealing the deal. You can get most of the information from the current owner, but some of the research you will want to do yourself.

Is this the right opportunity for you?

This is an answer only you can figure out. It is a good idea to speak with your spouse or other family members about this. 

Are you buying the individual business because it's convenient or is it an area you are capable of thriving in? Is this the appropriate time? All these questions should absolutely be answered.

Are there any skeletons in the closets?

It is possible that the current owners are looking to sell due to the company's misfortunes. 

To protect yourself you must always instigate a thorough due diligence process - checking the business is in the condition the current owner says it is. A comprehensive period of due diligence should involve both an examination of the company's physical assets - premises, equipment etc - its books and records and how the company functions day to day.

If you are looking at using a bank as your primary source of funding you will want to understand the numbers as they will be looking closely too

Among other things you could visit the premises and monitor footfall, or check its online reputation by visiting customer-review websites.

Remember, if you're buying a company, which bears profits and liabilities rather than the owner, then you're also buying any debt held and any legal problems - eg, if it's in trouble with tax authorities - it might be in.

Why are they really selling?

Retirement, health problems or a desire to seek new opportunities are common reasons for selling a business. However, it is possible there are problems with the business prompting the sale that the owner is not sharing. 

This ties in with the due diligence process above. Make sure you ask the seller why they are selling but remain vigilant against the possibility of hidden problems even if they assure you they are retiring.

You may never find out the truth behind it, but if you build a relationship with the seller you are more likely to receive honesty.

What are the numbers telling you?

This may seem a little obvious, but entrepreneurs often don't really know what their return should be. It's helpful to know how quickly you will see a return on your investment. Based on projections of previous earnings, how quickly will you recoup the money paid for the business?

If you are looking at using a bank as your primary source of funding you will want to understand the numbers as they will be looking closely too. Will the business's earnings be sufficient to repay the loan required?

It's arguably a good idea to use conservative projections to give yourself a safety margin should the business's performance dip. This means running the numbers as if sales are lower than expected and costs higher. 

Are renovations necessary?

Even if the initial asking price seems cheap, renovations and replacing ageing equipment could add a hefty sum to your initial investment. 

Does the building need major repairs? Is it equipped with a security system? 

According to, over 50,000 homes are burgled each year. If you're anything like me, and take your work laptop back and forth, it's probably time to invest in a security system at home as well as at your business. 

While adding an alarm system is not an expensive update and should not affect your decision, it is possible that there are more costly renovations that may merit some revision. You can always ask the seller to make these changes before you finalize the sale or have professionals give you a quote on repair costs. When it comes to making an offer you should factor these numbers in. 

What is your exit strategy?

This is quite possibly the last thing on an aspiring owner's mind. However, it's often wise to think about your exit strategy early on. 

Circumstances can arise that require owners to sell prematurely. You should put some thought into who you could sell to in the future and how you can make the business as valuable as possible to these people. 

It's important to understand the pros and cons of buying a particular business. Figure out what you can live with and what you can't before you seal the deal. 

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