BUYING A NEW BUSINESS
When most of us plan to start a business, we have the option of either building everything from the scratch or buying out an established business. However, both options have their pros and cons so it’s worth considering to check the risk and cost factor that comes with the decision. Most people refrain from running their own businesses because options that mitigates the risk results in increased cost and vice versa. Therefore, seeking the right consultation on factors that could potentially affect the risk vs return decision can be a lifesaver especially for a budding businessman. One of the most common factors to check the feasibility is Return on Investment (ROI) but not in isolation in fact in comparison.
The most common mistake buyers make is buying at a price which limits them from efficiently managing their resources. This results in cash shortage or failure to predict future cash flows to devise possible contingencies that might require more capital to keep things going. Buying all the receivables can be very risky because the older the account, the more difficult it'll be to recover debts. Most business buyers fail to verify all the data provided to them and accept all the information at face value. It is very important to keep in mind that not every business on the market is a good prospect. Many owners will be selling unprofitable or under-performing businesses. While this can be a chance to buy and develop a cheap business, it can also be a risky investment especially when one doesn’t have sufficient resources to mitigate risks and improve profits. The old plant and equipment might need major improvements which could be identified at a later stage by the new buyers. Therefore, a thorough inspection and audit can mitigate the chances of facing such a problem. It is often required to invest a large amount up front along with a compensation to pay off solicitors and accountants however, the amount paid to the professionals is a fraction of the amount and time the owner will invest. The business may be poorly located or badly managed, with low staff morale it might be challenging to cope with the transition. It is also important to not overlook external factors, such as increasing competition or a declining industry as this can most definitely affect future growth. Although, it may seem that established businesses may have a credible credit-worthiness and find it easier to seek loans but under-performing businesses can require a lot of investment to make them profitable. Ignoring the interest factor when seeking loans can be terminal for the business as the owners would not have a clear picture to make strategic decisions. The seller's personality and their established relationships may be a major factor for the success of the business as networking is the key to a successful business in this day and age. At Ali Syed CPA, we provide you with reliable consultations along with pre-screening of potential businesses and helping buyers to identify their area of interest.