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Buying a business as a strategy for growth: Top 3 things to consider

Would you consider buying a business in a global pandemic?

“When written in Chinese, the word ‘Crisis’ is composed of two characters.  One represents danger and the other represents opportunity.”- John F. Kennedy

In fact, John F. Kennedy was not entirely correct in his translation, the mis-translation is now so widely spread it’s even used by some native Chinese speakers.

Borrowing from the above saying and reflecting on the current global pandemic, the situation we are faced with now is most certainly a crisis – at the same time it is a time of real opportunity.

Many businesses have lost income due to the lockdown, yet many others have found new markets by adapting their processes to create new products. An example is a brewery that has started producing hand sanitiser.

Back to my question: Would you consider buying a business as a strategy for growth even in a global pandemic? What factors would you consider?

Acquiring an existing business in one of the inorganic ways of growing your business portfolio. Buying a business can be used as a strategy to either serve your existing customers better with similar products and services or as a way to diversify by entering a new market.

Buying a busines has got inherent risks regardless of market conditions, so it would be expected that buying a business in a global pandemic would pose even greater risks. However, there are many opportunities available as some business owners decide to exit their businesses for various reasons.

If you decide that buying a busines is the right strategy for starting or growing your business, here my top 3 things to do before parting with your money. These three steps combined, will help you to assess if the opportunity is RIGHT for YOU.

 

  1. Have a business plan and cashflow forecast – this is where you plan the future of your new business and decide how you will develop and improve it. What products and services are you offering? Are you targeting the right customers? Who are your competitors? How will you stand out? What are your strengths, weaknesses, opportunities and threats? What will your strategy for growth be? What will your internal management structures look like? What is the projected financial plan? Will you be profitable? What is your expected rate of return? How will you ensure you don’t run out of cash? It is important to have a business plan that you can implement once you have bought the business. Furthermore, this exercise helps to highlight any areas you should be asking for additional information from the sellers before signing the contract.

 

  1. Commercial due diligence – This is perhaps the most important aspect before buying a business. You should undertake thorough due diligence to satisfy yourself that the business is viable. Commercial due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential. You should review the financial accounts including the Profit and Loss account and Balance Sheet for at least the last 3 years. You should verify the assets and liabilities of the business and understand what will be passed on to you and what will not. You should review contacts with all stakeholders e.g. customers, suppliers and employees and understand your obligations to them when you buy the business. The seller should provide you with a buyer’s pack containing information about how the business is valued and what is included and what is not included. The seller is under no obligation to disclose matters they do not consider material to the sale, but legally they cannot give false or misleading information, so be sure to ask as many questions as possible. It is your responsibility to satisfy yourself as to the value of the business before entering into any contracts, so do take the time and if necessary seek professional advice to make sure this is done right.

 

  1. Seek professional advice – it is important to seek professional advice when buying a business. A good accountant will make the necessary checks and inquiries so that you are armed with full and complete information when making your decision to buy. They will help prepare your cashflow forecast, advise on the tax implications of buying the business and find ways of saving you money along the way. A good solicitor will draft the contracts and obtain warranties and indemnities from the seller to reduce your risk exposure. A surveyor may be needed if you are buying a building or signing certain types of leases. Again, your circumstances will determine what professional help you need. Do not be tempted to think you can do it all alone. Ask for help from your trusted advisor.

There are my top three things to consider before buying a business. Having a business plan and cashflow forecast, conducting due diligence, and working with your trusted advisors will help you plan and assess if buying a business is right for you.

Banbury is a vibrant town and we’ve seen an increase in enquiries to invest in the area. If you would like to find out more please contact gHawk Accounting on 01295 278208 or email info@ghawkaccounting.co.uk

 

About the Author

Lenah Oduor (BCom, MBA, CPFA) is a Chartered Public Finance Accountant and founder of gHawk Accounting. She has wide experience in tax, accountancy, and business management both in a commercial business environment and in public practice serving SMEs.

LinkedIn Profile: https://www.linkedin.com/in/lenahoduor/