Buying a business: What to look out for before jumping the gun
Aksvini Kamaran of imoney.sg talks about the advantages of taking over a business rather than building one from ground up and the best way to do itBy Aksvini Kamaran 07 Jul, 2014
When it comes to entrepreneurship, every individual has had starry-eyed dreams about being the next Richard Branson or Steve Jobs. Unfortunately, there are none but a handful of champions that emerge from millions of contenders vying to establish their brand in the market. The inception of a successful business is the glorious outcome of unstoppable motivation, business intelligence, marketing-savviness and luck. When even one of these attributes is found lacking, your business dreams can be left in shambles.
However, business newbies also come into the market with the wrongful assumption that establishing a business is an integral part of running a business. What we mean to say is that building a company from the ground up isn’t necessary when you have the alternative to take over a business from a third party and run it yourself.
By doing so, you can often pole-vault over the initial hurdles faced by business organisations such as establishing their customer base, devising marketing strategies, creating cash flow and building your workforce from scratch. When you acquire a business, you may not be compelled to make fundamental changes to your company’s procedures, policies and systems in order to keep it afloat.
Although purchasing a business is a lot pricier than starting one yourself, it’s a lot simpler to attract investments from financial institutions which tend to lean towards dealing with companies that have a proven track record. Secondly, business acquisitions can also give you access to invaluable assets such as patents and copyrights, which can open the doors to plenty of opportunities for your business.
What you need before getting into the hunt
So how do you know what business is a match made in heaven for you? Well to start with, your focus needs to be on an industry that aligns with your interests, experience and expertise, so that you have no trouble familiarising yourself with the nature of the business model.
Apart from scouring newspaper classified ads and online websites for business opportunities, you can also hire a business broker to hasten the process of narrowing down some solid options based on your requisites. These brokers assist in pre-screening businesses for you, negotiating with sellers and sorting out the essential paperwork entailed in a business acquisition.
Having a prudent team of bankers, accountants and attorneys is imperative in exercising due diligence and ensuring your business deal pulls through without a hitch.
Guidelines for a good preliminary analysis
Before you jump the gun, the onus of conducting a thorough preliminary analysis of your prospective business is on you in order to determine its health and determine the financial viability of acquiring it.
Here is a priority list of business insights you need to evaluate before coming to a conclusive decision on whether to buy or bail
1. Inventory – Examination of company inventory is a meticulous, yet necessary process that involves all products and materials inventoried for resale or utility in client servicing. Sieving through the past and present inventory records plays a key role in determining their correct monetary value.
Appraising your inventory and checking its condition for saleability will further help you estimate its present asset value, which can be a valuable point of negotiation
2. Legal paperwork – All corporate entities carry the burden of towering legal paperwork that includes lease agreements, employee contracts, distribution agreements, registered trademarks, sales contracts, copyrights, and dozens of other instruments that bind your business together.
Hence, a rigorous evaluation of these legal contracts and documents by your attorney is essential in understanding the transferability, limits and implications of powers that will come to you.
3. Tax and financial records (for last five years) – Getting an accountant to exercise his analytical expertise in determining the true net worth of a company after subtracting all liabilities is of paramount importance to a prospective business owner.
The organisation that you are zeroing in on must guarantee full transparency in their revenue records and tax returns. Any short-term or long-term loans, lawsuits, employee benefit claims, etc. need to be clearly highlighted as liabilities so that you are aware of the financial risk you are facing.
4.Industry and market assessment – A macroscopic analysis of your business’s position in the industry and the market segment you are catering to is important in identifying your business targets. Evaluating the economic outlook, demographics and competition in the industry you are dipping your entrepreneurial feet into will give you a better perspective on the scale and scope of growth required to take your business to the next level.
5.Reputation – Image is everything in the world of business, which is why you need to get a solid background check on the organisation you are eyeing by reviewing its reputation amongst customers, suppliers and fellow competitors. Remember, trust and success have a vice-versa relationship in the industry.
The author is Country Manager (Singapore) of imoney.sg
The views expressed here are of the author, and e27 may not necessarily subscribe to them
e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested to share your point of view, please send us an email to writers[at]e27[dot]co