Knowing how to buy a small business is a skill that should not be underestimated. Far too many people make a rash move to buy a company before doing proper due diligence and ensuring it is the right fit for them. So, if you’re looking to invest in your first business, or even your second or third, here is a simple 5-step guide on how to buy a small business the right way.
Step 1: Determining its true value
Before you get to work placing an offer on the business, there’s a few things you need to do in order to make sure it’s a wise financial move. First off, you need to determine its true market value. In order to do this, you will need to look at the cash flow coming in and the cash flow coming out. The owner of the business should give you full access to all financial statements going back at least 3 to 5 years. Here are the sorts of thing you should be looking for:
– How often has the business needed to borrow money to tide itself over?
– Does the business have loan agreements? If so, how many and to what sum?
– Is the business in a financially secure enough position to expand?
– What is the position of the accounts receivable and what are the typical account receivable timespans? E.g. 30 days, 60 days or 90 days.
Step 2: Will it offer you suitable returns?
Once you’ve taken an in-depth look at the financials, you need to decide whether the business will realistically give you suitable returns on your investment. In the short-run, this means understanding the Owner’s Discretionary Income (ODI). This is how much money the owner takes home in the form of a salary. Secondly, you should look at the projected value of the business 5, 10 and 20 years from now. Or however long you wish to remain a part of it. Will its predicted value enable you to cash out for a suitable amount?
Step 3: Assessing the competition
Anyone who invests in a small business without first analysing the competition is asking for trouble. As such, you should perform studies on the competitors and check them out for yourself. Also, try and speak to any customers and get their thoughts and feedback. For example, you might find that a larger, more financially stable business is looking to enter the local market, which could make your job much harder. You want to invest in a small business that has the ability to move faster and outperform the competition, rather than get swallowed up and left behind.
Step 4: Reviewing the legal documentation
Reviewing legal documents is a tedious and intricate job, but it is a vital step to take prior to purchasing a small business. It is usually best to bring in the help of a qualified and experienced accountant with this step. They can help highlight any important clauses or issues that you might have missed. For example, there might be legal agreements in place with suppliers and old employees that are not to your liking and that undermine the business’s potential. Never agree to a sale without first doing proper due diligence.
Step 5: Raising the funds
If you have the cash to spare and are looking to buy the small business outright, then you are in quite a fortunate position. However, if not then there are still plenty of options available to you. Of which, private lending is probably the most attractive option. Here at Global Commercial Capital, we offer both unsecured and secured small business loans, designed to help small business owners expand and succeed.
Unsecured loans range from $10,000 right up to $500,000. Whilst secured loans could see you accessing anywhere from $150,000 to $1 million worth of funding. Our generous non-bank loan agreements have helped numerous small business owners all across Australia to quickly make a move and seize small business opportunities as they present themselves.
If you’re in the process now of reviewing a small business opportunity and would like the help of private lenders, then simply contact our friendly team to find out more.