When buying an established business, thinking that the business is already up and running and all that is required is to sign the papers and pick up the key is not necessarily correct.
The economic cycle is, at present, moving out of recession, and this may have had a negative impact on an existing business.
Below are 10 things that business support franchise, Smart Business (NZ) Limited suggests to investigate prior to buying an existing business:
- Firstly, find out if the business is solvent and if it owns all the assets for sale (tangible and intangible) before sinking any money into an established business.
- Last year may have seen consumers spending their money just on essential items, was there a decrease in sales? Will new and innovative methods need to be devised to attract customers towards this business?
- Higher expenses and lower profit margins mean many businesses have tightened their financial belt. In 2009 did the previous owner give priority to those expenses that will put the business in the best possible position for the economic recovery in 2010?
- Check if the business regularly made payments by credit card; how the business expenses were tracked compared to income; and whether any new loans or overdrafts have been taken out in the last 12 months.
- How long has the current owner had the business? Stay away from businesses that have changed hands repeatedly in the past as they are usually white elephants and money could be lost.
- What type of reputation does the business enjoy in the community right now – not in the past?
- Why is the owner selling? How might this impact the business and the new owner taking it over?
- Make sure to use the services of solicitor to assist with the purchase. Ensure they are knowledgeable with regard to business debt. The new owner should get free and clear title to the business, without liens or liabilities so that they do not, unknowingly, take on any business debt.
- What is the current relationship with suppliers like? Outstanding contracts from the previous owner may need to be honoured or renegotiated.
- If the business has been neglected or allowed to run down, an investment may be needed on top of the purchase price to give the business the best chance of success.
In the current market it is prudent to think very carefully before deciding to buy an existing business.
Finding finance is going to be a tough challenge. Banks have pulled away from lending to large, established companies, so it can only be imagined what they're telling unproven business owners who are just starting out. A strong personal credit rating is mandatory, but it won't necessarily be enough. Be prepared to front plenty of cash and collateral.
Regardless of the economic weather, businesses will still need their bookkeeping, accounts and payroll done; GST returns filed; phones answered and paperwork organised. Business looking to save money can employ the services of a business support franchise such at Smart Business (NZ) Limited.