Buying a business is not as straightforward as purchasing a home appliances from a store. But the same methods apply. You need to understand the business well, know what the market is like, do your due dilligence on the business and make sure the price is right. Many people perceive that buying a business is easier than starting one from scratch, but that is not always true.

There are several advantages to buying a business and that includes having a customer base and cash flow running through the business. This is of course, assuming that you are taking over a healthy business. You immediately inherit a skilled workforce, working systems and company policies which you are unlikely to change immediately upon takeover.

One of the greatest disadvantages to buying a business is the amount of money needed to takeover the company. This amount is often more than what is needed to start a business but usually this comes with a bag of valuable such as copyrights, inventory, and equipment.

Nevertheless, you can never be too sure, so conduct your due diligence before making that purchase. How? Follow these simple steps.
 

What You Know is What You Get

The rule of thumb is to avoid going into businesses which you are not familiar with at all. If your background is catering, do not try to dabble in the biomedical industry. Chances are the market dynamics are vastly different. However, this is not a hard and fast rule for everyone. The point is, only embark on a business which you have confident knowledge in. Know where your skills lie and what value your previous work or business experience can bring to the table.

After narrowing down to the industry you want to embark on, pin down other crucial details that can help you search for the the right business to buy. Some details you may want decide on include the size of the company (in terms of employees), the location(s) of the business, and the business's market size. With these three essentials, you are able to roughly assess the cost of running the business and prepare yourself for the numbers involved in taking over the business.

Of course, throughout this whole process, you might want to consider putting together a team of experts to help you assess the viability of potential businesses. Get an accountant, a lawyer and your banker to help you ask some questions like – Why is the business for sale? What is the market size of the business? What are some of the trends associated with the business?

Do not be afraid to talk to people associated with the business. Interview some of the key staff, have lunch with existing customers and arrange for coffee sessions with existing vendors. Chances are they will be able to provide you valuable information which the business owner was not inclined to provide you.
 

Details, details, details

It never hurts to know too much about a business before becoming its owner. Ensure that you have this list of things to get to know the engine that keeps the business running all these years:

1. Contracts and legal documents: This refers to any agreement made between the company and other parties. This runs the gamut from vendor contracts, rent leases, distribution agreements, sales contracts, employment contracts, copyrights, patents and other legal paperwork. If there is valuable intellectual property owned by the company, get a lawyer to assess it.

2. Sales files: Sales records are highly important to get hold off, because it dictates how well or poorly the company has done over the years. Looking at numbers is not enough; you need to evaluate the highest and lowest sales months to understand better the factors at play in determining the sales numbers.

3. Financial and tax records: You might need the help of your accountant in studying the company's financial health for the past 5 years or so. To evaluate the earning capability of the business, you need to evaluate the financial records against the company's tax returns. Your accountant should know what the industry benchmarks are like, in order to make a fair assessment.

4. Inventory: Keep abreast of all the products and materials in stock that is meant to be sold, resold or used as product samples. Have a company representative to guide you along the inventory process and take note of the quality of the products and materials. More often than not, the inventory can affect the value of the business, and becomes a negotiation element. Start to negotiate if you feel the products are not up to par and get the right price for it.

5. Equipment and furniture: These two sets of items come together with the business and affects the selling price as well. The seller should be giving you a list of items, including its model number, date of purchase and present condition. Check through the list of items versus the items themselves if you need to.

6. List of employees and organisational structure: It is imperative to know the team behind the business. Employees are assets of the company and it is important to understand the team dynamics. This also gives you a snapshot of employee salaries and management policies.
 

This list is of course, not exhaustive. There are many other things to note before buying a business but this is a preliminary look to what you need to know. Manage your expectations and always be prepared to face a body of information which you need to interpret.