To buy a business or to start one
In a nutshell when you are buying a business these factors are very important, due diligence, having a chartered professional accountant beside you, clean accounting reports.
Starting anything from scratch is a lot of fun and at the same time not so easy. So is running a business if you start from scratch and success there is a huge reward waiting for you however, if you don’t want to take that risk there is another option, buying a business. What is involved in starting a business?
Well, you need a customer base, marketing plans and strategies, hiring employees, making money and watching your cash flow and budget, taxes …. You get the picture. There are endless tasks and high risks, not to mention the time you need to wait for your investment and hard work to pay off…
Purchasing a business is less risky as long as you have the capital; established businesses are selling for more than its costs this is goodwill. When you purchase a running business, you are just following the process that someone have established, hence turn-key operations. Employees are hired, suppliers are lined up, customers are coming, store lease is negotiated and in effect, mistakes have been made and experience has been gained and passed on to you. Or is it?
Before you sign that agreement, 1st have a look at the financial statements, how are the numbers? Are there any trends? (for this read my blog called comparative financial statements) loss? Profit? Capital assets? Any obligations? How much are the payables? Are they all booked? So many questions that you need to ask at this stage.
As trusted business and financial accountant advisor and Chartered Professional Accountant in Ottawa we make sure that our clients have the best decision making tools at the disposal. We take them through and help them consider the following issues:
Investment price – Is the business worth the dollar value? How is this price generated?
Some business may show 2 million dollar in sales that is amazing right? How much would you pay for a company that has a sale of 2 million dollar? I wouldn’t pay anything just yet, I would look at the expenses and costs first. How about if it had 2.5 million dollar in costs? Nortel, before it stocks were downgraded to penne stock was generating billion dollars in sales. So where was the problem? No cash flow and also no profits. Profits are one of the keys.
1st this we ask our clients to do is to obtain the company’s financial statements with us and we go through the numbers crunching them.
By definition, due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It will take time and we need to ask a lot of questions.
If all the numbers and reports are good and we are happy with our due diligence, there is a good chance that you will succeed by buying a profitable business unless things change. A few of my clients bought great Franchises and are making a comfortable living.
Make sure you have some back up cash available to you till you get comfortable with the business. I would recommend not taking any money out of the company just
KNOW what you want
You can’t bring it back after a few months and say this is not right for me. You could but now you have to sell it yourself and forgo in some cases 12% commission, ouch!. Ensure, you love everything about that business. I see a lot of people as well who tell me they should have bought something else the business is not a good fit.
These are just some of the most important things that you need to know when purchasing a business. To find out more about due diligence, financial statements analysis, and number crunching and so on call me please at 613 266 7013 or come see us at 2435 Holly Lane.