Three essential questions to ask before you buy a business

We spoke to a businessman recently who had enjoyed years of success as an employee of a major international firm. He was used to overseeing high pressure meetings, securing important contracts and delivering results for his employer. But after reaching a point of financial security, our contact, let's call him Jim, decided that he wanted to branch out and take more control of his working life and buy a company.

Despite years of experience in business, Jim's acquisition hunt was far from focused and he was wasting time pursuing the wrong businesses. Our discussions over the past few months kept coming back to three main points. We thought we'd share them here given that Jim's situation is far from unique. Hopefully they will offer other new buyers a starting point on their search for an acquisition.


What will be my exit strategy to get out of the business?

It seems counter intuitive to begin with your exit strategy, but starting at the end of the acquisition process – i.e. the sale of your next business - should give you a much clearer outlook of exactly what you want to gain from the process and help focus your search.

Ask yourself if you want to buy a business in order to sell it on for a profit; or perhaps you want to pass it on to a family member or turn it into a franchise a few years down the line. Working out where your end goal is will help target your resources from the start.


How hard do I want to work?

The answer to this will depend largely on your motivation for buying a business in the first place. But once you’ve decided what your ideal target is, balance this with the hours you’re willing to put in. Again, this will help to narrow your search to ensure you don’t waste time looking at companies you don’t have the time to turn into a success.

Once you’ve homed in on a company and you’re getting down to details, find out how many hours the current owners put in to run the business. Ask about their motivation for selling, are they simply exhausted? When did they last take a holiday?


How much money do I have?

Don’t lie to yourself. How much can you really afford to spend as an outlay? How much backing have you got from other sources of funding? Look at all the figures and balance the initial cost very carefully. Estimating figures at this point is a recipe for disaster and will put you at a serious disadvantage when it comes to negotiating with sellers.

Don’t forget to take into account how much you will need in ongoing running costs as well, particularly if you’re taking on a distressed business. There is probably going to be a period of loss during which you will need to secure alternative income while you implement a turnaround.

These questions are just a starting point and there are a vast number of angles you need to consider before you buy a business. But answering these questions for yourself should help to get the basics in place and allow you to take the first steps in making your acquisition plans a reality.

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