Buying a business is not for the faint hearted and there are lots of variables to take into account when decided to proceed or not. If you manage to buy well you could improve the business’s profitability, cash generation and value. However, buy badly and you risk over-paying on the purchase price and sinking cash into an under-performing business. Therefore it’s really important to undertake proper due diligence when as part of the process of buying a business. It’s also neccessary to plan out your finances before committing to a purchase.
Planning your finances
When buying a business, whether it’s a convenience store, dental practise or restaurant, it’s imperative to plan your finances well. Fortunately, if the business you’re buying is already running, then you’ve got a good starting point. Here are some good things to do:
- List out major costs. What are your capital expenses going to be? What assets will you need to buy? Will you need to take on more staff? This is a great place to start.
- Work out how the overheads will change. Review the overheads/admin expenses listed on the seller’s financial accounts. There’ll be expenses listed that you may be able to reduce. There’ll also be expenses listed (or maybe not even accounted for at all) that you’ll need to increase. For example, the owner’s family may be working but taking low salaries, whereas you may need to pay higher salaries to new staff.
- Fill out a cashflow forecast. This is really important and something perhaps worth doing with your accountant. You’re likely to spend more cash than you think, so taking the time to plan ahead is really helpful. Getting that second pair of eyes to look your forecasts over is also useful. Here’s a link to an Excel cashflow forecast template if you need one.
Advice when buying a business
Getting good advice when making big decision is always recommended. However good or low-risk you think an opportunity you should feel confident enough to ask for a second opinion from someone you trust. This should be someone who won’t just agree with you! A trusted accountant, business associate or commercially-minded solicitor can be the difference between making a good decision or a bad purchase.