So you are thinking about buying a business! Go for it. Purchasing an established business is one of the best ways of becoming a business owner. But make sure, before you commit, that you really know what you are getting yourself into. In other words, do your homework. This article touches on a few of the key things that you need to consider as you make your decisions about buying that business.


Forget the business, evaluate yourself!

Self-evaluation is a difficult thing to do, particularly if it may indicate that you do not have an entrepreneurial personality. Here, there are two pieces of good news. Firstly, and contrary to popular belief, you do not have to be "entrepreneurial" in order to own a business. But what is important is that the type of business you select and your approach to getting into the business should be geared to your personality. Secondly, studies consistently show that personality traits can be adapted as long as you are aware of your existing strengths and weaknesses and of what areas need development or should be compensated for.

In addition to personality, you need to carefully analyse your financial circumstances, business experience, technical knowledge and skills, and various personal factors such as age, health and family circumstance.


Develop screening criteria

Examine your objectives. What is motivating you to buy a business? What constraints do you have? Based on these and your self-evaluation, identify potential types of business or industry.
With these considerations in mind, prepare a list of operational and financial criteria to consider when evaluating potential candidates. Your list will include marketing, production, management and administration and financial criteria.


Identify candidates

The most obvious and recommended approach is to discuss the results of the previous two steps with two or three business brokers. With their experience, they will normally be able to help you channel your thinking and find potential business opportunities. Tread carefully in your dealings with brokers, however. They are not on your side: their commission is paid by the seller, based on a percentage of the price you pay for the business.

Businesses for sale are also advertised by their current owners in newspapers and business magazines. A direct approach to existing owners, who may not even have considered selling their business, yields surprisingly positive results. Consider that option as well.


Evaluate

Critically probe for why the business is for sale. Be prepared to dig. The responsibility of investigating the business belongs to you, the buyer. Don't depend on anyone else to do the work for you. Outside professionals normally won't tell you that you should buy the business, nor should you expect them to.

Always assume that there are "skeletons in the cupboard". These are hidden problems that many businesses may have, which may be part motivation for the business being for sale and which may cause you problems later on.


Compile YOUR OWN Business Plan

The seller or broker will probably provide you with a business plan showing the business up in the best possible light. That is their job. Yours is to harness their knowledge of the business in preparing your own business plan that explicitly highlights all assumptions made (there are typically hundreds of assumptions inherent in any business plan) and which you will use, not only to help put a value on the business, but as your blueprint for managing it in the future.


Place a value on the business

A business is only worth what a willing buyer will pay for it. There are several suggested methodologies for placing a value on a business, most of which are wholly inappropriate in the context of small and medium businesses. What you will really be buying is a future income stream, without which the business essentially has no value. The future income stream must be based on current earnings that the seller can prove. Ignore claims of unreported income: if the seller is prepared to risk a criminal record by lying to the taxman, rest assured that he will be happy to lie to you.


Negotiate the structure of the transaction

Like most of the steps described above, negotiation is a comprehensive and complex discipline in its own right. Many books on the subject are available and should be studied by business buyers (you can be sure that brokers acting on behalf of sellers are experts in this field).

Your objective, more so than the other parties to the transaction, is for both you and the seller emerging with the satisfaction that they are better off than they were before the deal. The reason for this is that you need to ensure continuity. You want to have a good relationship with the seller so that they will be willing to teach you the business and act as a consultant, at least for a while.


Most importantly, Plan your acquisition process

Before you start, plan your acquisition process. Both sellers and brokers will be urging you into a quick decision. The uncertainty and excitement of getting a business will further encourage you into an early decision. Resist these pressures: it is your money and your future. Insist on following your plan.

Although buying an existing business is filled with many potential pitfalls, it is still one of the best ways to get into business. The business has a track record, customers, an established presence. Take a prudent, conservative approach, studying the business that is for sale, without letting anyone push you into a premature decision. The key to a successful business acquisition is information and knowledge on the part of the buyer and the common sense to apply it.

Andrew McGregor is a director of the business PLAN. He can be contacted at adm@tbp.co.za or (011) 782 6746.

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