Buying a business is a complicated process. Contributing to that complication is the fact that the process appears straightforward initially. If you can recoup the purchase amount with profit in a timeline that works for you and the business seems stable, it can seem like the process will be simple. However, there are several unseen items you should iron out before closing.
The first few items revolve around finances. You’ll want to look at P&L statements and go back a few years to gain a very good understanding of the company’s finances. This could reveal things that a more general financial overview might not. Did they have any expenses they paid up front and want to be reimbursed for? Were they paid up front for work you’ll perform after the purchase? Are there any expenses which are essentially paying a bill for a client, which could inflate revenue? Reviewing this thoroughly can help get a clear picture of what the finances looked like in the past.
The next few items to look out for revolve around people. You need to get a feel for the company culture and the employees, and most importantly the relationship between the owner and clients. It’s good to look for any clients that may have become clients due to a relationship with the owner. It’s wise to assure that 20% of the company’s revenue isn’t coming from family and friends, since the likelihood of retaining that businesses will decrease when ownership changes hands. It’s generally a good idea to have the previous owner stay on for a period of time to gain a better understanding of how they operated and interacted with clients and employees.
On a more positive note, look for items that you could improve immediately. Look for opportunities to cut overhead or upsell existing clients. Finding hidden value in this way can help boost the performance of the company immediately after the purchase.
