Before purchasing a business, you have to make sure to understand precisely what you are buying. And that might be challenging. According to A Neumann & Associates, evaluating a business is a complex task. However, the steps you should take before buying a company include the following:
#1. Perform Due Diligence
The first thing you need to do when buying a business is proper due diligence. You must assess its legal status, financial statements, equipment and accounts receivable, and inventory. Try to get a detailed list of precisely what the vendor sells, including the business name, customer list, land, buildings, equipment, prepaid expenses, intellectual property, or any contracts with suppliers and employees.
It would be best to confirm the vendor’s good faith and whether its customers intend to continue doing business with the firm once you have bought it.
#2. Get a Business Valuation
Determining a business’ value is a complex process, so getting an accurate and objective opinion from those who can evaluate a company’s value is best. A mergers & acquisitions valuator can use one or multiple valuation methods based on the available information and the type of business.
Some of the most common valuation methods are:
- Earning-based methods: reviewing past results and forecasted earnings or cash flow
- Market-based methods: applying a valuation multiple which can be based on taxes, earning before interest, amortization, and depreciation
- Asset-based methods
#3. Assess the Business’ Assets
There are various ways to determine an asset’s fair market value. When assessing the value of business equipment, you must have warranty details, maintenance schedules, dates of purchases, model numbers, and records of how well the equipment works. When appraising inventory, you need to check the condition and age of the stock and ask if any of these products are obsolete. If any items are perishable, you should ask whether they are within their expiration date.
In addition, when assessing accounts receivable, it’s vital to determine how likely the amounts owed will be repaid. Then check the receivables’ age and whether they are collectible. Ultimately, ask if any disputes or adequate provisions have been made for bad debts.
#4. Look Into Any Liabilities
Knowing if the business has signed any agreements that could lower the assets’ value or limit your freedom of action is critical. Based on the assets’ nature, a business’ loans or unpaid liabilities could become your responsibility as a buyer. Moreover, a previous lender might even seize the business’ assets as repayment for an unpaid loan, leaving you with nothing.
#5. Determine Whether It’s Best to Go All In or Only Buy Some Shares
Anyone purchasing shares in a business takes a stake in the company, its liabilities, and assets, regardless of whether they are recorded on the business’ books. In addition, a purchase agreement might include a provision that involves you directly in the management of the business, or you can remain a silent partner. You could also have the option to buy out the remaining share and become the sole owner later. However, such a scenario is more likely if the target company is publicly traded and you bought enough shares to influence how it is run.
Following these steps to buy a business can help you profit and make a smart decision.
