How to buy a business to resell

November 11, 2018

Deciding to buy a business to resell it is fundamentally different from starting your own business or buying a business.

The end result of any business resell project is exactly that. The sale. With this foremost in mind for every decision and transaction that follows. It keeps the endgame present at all times.

There are several factors to consider when choosing a company to buy for resell. All should give you clues as to a business’s potential to increase in value. It should give you a bigger profit when it becomes time to sell.

Resale of the Century

Firstly does the business have name recognition? Do people know about it already, does it have an existing web presence and social media audiences? How is the name and reputation of the business regarded?  If it has become a byword for poor practice then it might be worthwhile to rebrand. You could jettison the existing name at the earliest opportunity.

Does the business have an existing customer base to work with and bring in revenue from already? How much of this is repeat business that can be relied upon to an extent? Does the business have good staff, equipment, structures and systems in place? Can they be immediately upgraded or enhanced to add value straight away? This will all add value and make it easier to sell a business in future.

Any expert on growing a business will tell you the due diligence is key here too. When you are examining the balance sheets, look to see what the real money figures are; how much is invested in the business, how much is coming in and how much is going out. Is the business underperforming and why? What are the problems and how can they be fixed? How much will it take to fix them?

How’s Business?

There are some key points to look for in any prospective business purchase:

  • Survival instincts– Is the business functioning and making money despite itself? If it makes money despite poor service and customer experience, shoddy presentation, bad attitudes and reviews, chaotic management etc. then it could be a good bet as these things can be rectified.
  • Cash flowing – When identifying a potential business to buy one of the critical factors to consider is the cash flow. If the business has decent cash flow then this is a good sign, if it doesn’t then you could end up stuck with a large asset investment base or large stocks without the means to move them out adequately.
  • Quick study– Ideally you need a business you can grasp quickly and that is selling things that people want to buy and are buying. A business with specific skills such as a knowledge based company or a legal firm say will require big investments in technical training and skills to function well.
  • Bad sales and marketing – It sounds counter intuitive but poor marketing and sales material can be a good indicator of opportunity. If you have an existing customer base to test it on then even better. 
  • Don’t buy a dog and bark yourself – One of the advantages of buying a business in a specific area is that a qualified manager could run it according to your overarching rules and systems better than you could. A chef can run a restaurant and a hairdresser a salon with greater attention to detail, nuance and ultimately profitability than a non-specialist.
  • Exit numbers – Always keep the end goal in mind and concentrate on the numbers that matter. What can the business reasonably earn in a month? Can profit and capacity be increased sufficiently in the short to medium term to sell it profitably or can it be sold for an even bigger margin in the future. Remain objective and try to avoid falling in love with the business if it isn’t going to become YOUR business. 

Exit strategy

You should always seek expert professional advice before actively looking to purchase a business. This is in addition to the services of a solicitor and an accountant.

Once you have completed your initial research, begin to shortlist some appropriate and realistic candidates.

Once you have contacted them and confirmed that they are interested in selling a business then you can move onto your due diligence. Look carefully at the financials and note your key findings. It’s also a good idea to be discreet at this stage. The owner may not have told the staff or want them to know that they are selling.

Arranging the financial package should also be done at this stage. Lenders will usually require the details of the business and sales particulars, the accounts of the last three years, any financial projections and details of your personal assets and liabilities. You should also get additional independent advice if your purchase also includes property and any refurbishments.

Once you have the financial package put together make a formal offer. Even if your initial contact is in person or via the phone, it has to proceed in writing. The phrase Subject to Contract included in all correspondence.

Depending on how hands-on you want to be with the new business you can negotiate an overlap period with the owner. You can become familiar with the day to day operation of the business before officially taking over.

The final stage of purchase has to meet certain conditions above the agreement of a price and terms of sale. These include verification of financial statements; transfer of leases, contracts, licenses, finance and new or existing VAT registration.

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