How to make sure your new business is a sound investment

| 4 min read

When searching for a company that you’re interested in buying, it can be quite easy to get caught up in the process and miss some important steps. Regardless of how great a firm may seem, it’s always vital that you take the time to do proper research on the establishment to ensure that everything is as it seems – as well as to get a better understanding of whether or not it’s ideal for your needs.

The due diligence stage can be one of the most important for you as a buyer, as this is the part of the process where all the information provided should match up to what you expected, and overall give you peace of mind that thebusiness is what you’ve been looking for.

What is due diligence?

Generally, it’s essential for anyone in your position to ensure that the due diligence process is done correctly. It involves an evaluation of many areas of the enterprise you’re considering purchasing, like financial situation, if there are any legal issues, etc.

When it comes to this stage, you’re likely to be quite invested in the idea of purchasing the establishment, so it’s generally worth hiring professional assistance for this, including a solicitor and an accountant (as two examples of specialists you’ll need).It may seem long and complicated, and while it can be sometimes, it’s often vital to ensure that you know every aspect of the organizationthat you’re going to be buying before making a commitment.

Here are just 4 of the things that you should take a closer look at during this stage of the process:

1: Ensure that everything is above board

If there is any missing legal information, it could cause you unnecessary stress later on, so it’s generally a good idea to hire a solicitor who is experienced in these types of transactions to check all of the legal documents and contracts. A few examples of these include:

  • Distribution agreements
  • Energy Performance Certificate (EPC)
  • Leases
  • Profit and loss statements
  • Purchase agreements
  • Tax returns

Also, finding out if any licenses, permits, and insurance deals are valid too, since this is something that can be important to know if you do decide to buy. Information on employee contracts can be crucial if you’re going to inherit the staff of the company, so ask for this too.

2: The establishment’s financial situation

If the business isn’t doing too well financially, this is another huge thing to consider when deciding whether or not it’s worth buying (at the very least, this could affect the asking price). Ask for balance sheets, cash flow statements, tax returns, etc. from the last 3 years, and see if all bills and payments are being received on time.

Sales records are important too, so don’t feel afraid to ask to look at them. They can help you to get a better understanding of the company’s general performance, as well as if there are any seasonal patterns that you should be aware of for when you’re in charge.

Understanding buyer behavior can be a great benefit, so ask the current owner if they’re willing to provide you with information that may help you to understand the consumers and/or clients when you take over (of course, some may want to hold back on sharing certain information to protect the identities of customers). 

3: Future opportunities

Another key element of due diligence is to understand the strengths and weaknesses, to start forming a plan of what you could do with the establishment once you’re the owner. The more you understand, the more prepared you’ll be to take full advantage of every opportunity that presents itself. Business operations, industry data, and thecurrent strategies in place are just a few of the things that can be important to the future of the establishment you purchase.

There are so many factors that could provide valuable information to you, both in the decision to buy and for when you’re actually in charge. Also, if assets and stock are included as a part of the transaction, you don’t want to be robbed of extra money – so figure out if the valuation takes into consideration the age, general selling price, and most importantly; condition. If you don’t check, it could cost you quite a bit of cash.

4: Don’t do it alone

Professional advice and experience in these types of transactions are crucial, which is why it’s a must to get the assistance of experts when buying a business.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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