1 Decide what type of business you are going to buy.

You have a choice. Do you want a profitable business that you can improve, or do you want the challenge and potential higher rewards from a distressed business that you can turn around? If you buy a profitable business, you’ll have income from day one and an asset that has a clear value. A distressed business, on the other hand, is likely to cost you much less to acquire.

Do you want to buy the shares or the assets? If you buy the shares of the business from its shareholders, you own the assets and liabilities, which could include bad debts, creditors, long property leases, stock-in-trade, and an unknown number of skeletons, which may be invisible until after the sale is concluded. You can avoid this scenario by buying just the assets that you want.

Don’t think that just because a business is struggling, it is a business that you can’t fix.

Which business sector should you choose? Preferably one that you know something about, or that interests you, or that complements your existing business. Avoid any sector that you don’t understand. Also, stay clear of retail and any business in a highly regulated sector unless you really know what you are doing.

2 Determine what the seller wants from you.

Everyone focuses on the money, but this may not be the seller’s priority. Knowing that their business is in safe hands and knowing that you’ll look after the staff and customers can be high on their list of priorities. They may just want to get away from a stressful situation, particularly if the business has been struggling.

You need to uncover and understand why they want to sell. Whether it is a profitable business or a business in distress, the wants of the seller can be quite different. Money is important but tease out the other priorities in your discussions with the seller. They could impact dramatically upon the price you pay.

3 Why should they sell to you?

You need to establish your credibility as an investor so that the seller will take you seriously. You also need to establish rapport with the prospective seller. Have a practiced elevator pitch at the ready that sounds completely natural and can be easily understood. Also, be prepared for the obvious seller questions such as:

‘Why do you want to buy my business?’

‘What do you intend to do with my business?

‘Have you got the funds to buy my business and the working capital to keep it going?’

4 Source businesses for sale

Tap into your personal and professional network, your clients or suppliers, or even your competitors. There are also websites that advertise businesses for sale. You can also try direct marketing, building your own list of prospective targets and contacting them directly.

Other ways to find businesses for sale include approaching a broker, and this can speed up the buying process because they will already have much of the information you need. However, the broker may have raised the seller’s expectation of price and also of getting paid on the nail.

If you have identified the sector where you want to operate, then you could place adverts in relevant journals that serve this sector. You can do something similar online, e.g., Google ads.

5 The Signs of a Solid Business

A profitable business will have high margins and significant assets, strong recurring revenues, and sufficient funds to cover operating expenditure and capital expenditure. It will have a history of steady sales backed up by a well-established and effective marketing regime, good systems, and staff.

Lots to think about. More next week!

 

Alan E Long

The Long Partnership

07770 738770