Buying a small business for dummies
In this article we shall talk about things to consider in buying a small business only. Large business owners usually come along with their consultants for the deal.
No offence but we do get a lot of enquiries on how to buy a business. That is why we decided to pen down an article specifically for those who know nothing about the process involved in buying a small business.
First thing you need to understand when you look to buy any business is you will not start work the very next day. There will be a lot of paperwork, due diligence, taxation issues, payment to the seller and finally the transition phase.
Secondly, you need to know what each step has to offer.
Paperwork may include signing a non-disclosure agreement with the seller. This is usually signed to protect the seller’s confidential financial information if the deal does not go through. Similarly, to protect your own interest, you may want to sign a non-competence agreement. No buyer of business would want the seller to start a competing business immediately after completion of sale deal.
Due diligence is very important. It is at this stage you understand the internal working of the company. The financials may speak a different language than the reality. As a buyer check for key indicators like
- Does the business have repeat customers?
- Are the receivables long outstanding?
- What is the billing cycle?
- Is there any dead stock lying around?
- Are the books up to date?
- Is there a loyal customer base?
- More importantly, is the identity of the owner separate from that of the business?
- Is the seller of business, the key rainmaker in the company?
Taxation and finances play an important role when you buy a business. If you are planning to buy a business using external finance, keep your records ready like income tax returns, bank statements, KYC documents etc. Take help of professionals to understand the impact of business on your financials. Purchase of business forms part of assets but you need to consider on the basis of deal treatment. You may choose to show individual assets or maybe whole of business as one single asset.
Payment to the seller and other overheads need to be considered. I agree when you buy a business, you have to pay to the seller. What buyers forget to account for is cost associated with buying a small business like broker fee, professional cost of lawyer for drafting, tax expert cost etc.
The last leg in a deal is transition from seller to the buyer. This is the phase where the seller of business onboards you and explains about the business. Listen carefully and take notes as much as possible. Consider the seller of business as your mentor.
If the transition stage is done properly, it can be a deal breaker. Majority of the clients decide whether they want to stay or leave on the basis of the transitional phase. What we have also observed is when buying a small business make sure the customers are well communicated. If they are not communicated then the chances of customer loss is huge.
The more interest you show, the better!