Intricacies Of Buying A Business
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Merager Financial Solutions
Are you thinking about buying a business? Are you in the process of buying a business? Do you consider that something that you might need to know about sometime in the future?
A lot of businesses do. Some of the most successful businesses buy their competitors. I know somebody that did that. It was about a decade ago. Absolutely fantastic decision. His business is going crazy.
I spoke with a business owner just last week, and he bought a domain. It was a brilliant domain. Because of that, and it cost him a good amount of money, he is getting free traffic. He doesn’t really even have to do any other marketing.
There’s a lot of really good reasons to buy a business and think about buying a business.
Of course, there’s a lot of intricacies in buying a business, not only the financials, of course, the taxes the profit and loss, the balance sheet, all those things. There’s also how much the business is going to make. What’s the profit? You really have to see a lot of different things including the revenue that’s coming in which can change based on a number of different things.
What if there was a carwash for instance? So that’s great the company was making a ton of money, but what’s in the process is another carwash is going to be built just half a mile down the road, a huge change in revenue.
Those types of things really need to researched, see if there is any plan in process, what’s going to happen to that.
There’s also things, obviously the expenses, right? You need to know what the expenses are going to be. My company does this work and we’ll get the financials, and we’ll see trends, that’s what we all want to see.
If a company has had a huge piece of equipment and they’ve been using it for a number of years, it only has maybe a seven year lifetime, and it’s in Year Three or Four, what can happen is that the maintenance costs are going to start to go up at a much higher rate as every year goes by. That increase in expenses is really going to make a difference, so we need to look not only at what is happening right now, but what we expect to happen in the future.
There’s so many aspects of this that are really important including the contracts the company has, especially if it’s a service company, the contracts that they have with their clients, the contracts that they have with vendors. I’ve had companies where vendors have given a sweet deal that has an expiration date, and that might have to be renegotiated. The company may not want to renegotiate it. It may not be in their best interests, and that could decrease profits substantially.
We want to make sure that our clients, this target company, that the clients have long term contracts. I want to see what they are. Maybe they’re not long term contracts. Maybe there’s a lot of short term contracts, but we want to make sure that they’re signed contracts, we know what the income is going to be, and we know what the expenses are.
What I also want to make sure that within the books that we know how much each client is bringing in profit which is then an interesting thing because you think, “Oh, okay, well this company that I’m thinking about buying, they’re getting this much in profit.”
The thing is that a company could have, worse case, it has one client, and if that client goes away, then the entire business is going to go bust.
There’s also the possibility of having multiple clients which can be great. Maybe they’re really short term. Maybe they’re two or three month contracts, but we want to see that we’re getting new clients in on a regular basis. And we want to be sure that the due diligence is being done of engagement letters being created so that everybody is onboard, they understand the same thing, there’s not going to be something like a huge recall of the company’s goods or services.
There’s a lot of different things that we want to look at. I love talking about these things. I love talking about the big picture type of situations that can really enrich your life as a business owner, both professionally and monetarily.
Give us a call. We’d love to chat. Love to talk this through and figure out what the best solution is for you.
I’m Steve from Merager Financial Solutions. Give us a call.
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