Small Business Advice : Buying A Business | Stuff.co.nz

I'm looking at buying a business. What are the risks I should be aware of before I take the plunge?

A: Key commercial risks to identify, and ensure you can mitigate, during due diligence are operational and financial.

Operational risks cover the company's physical assets; are they in good condition, fit for purpose and provide capacity for future growth?

Risks that you should evaluate include people and culture (qualifications and experience, relationships with key suppliers and customers, commitment if a new owner comes in); legal (contractual or legislative risks may be present); suppliers (certainty of supply and strength of relationship); customer diversification (is the business over-reliant on any group of customers?); and product diversification (how much revenue (and more importantly profit) is derived from the goods or services that are being sold?)

Financial risks to consider include evaluating the proposed capital structure of the business following your purchase (mix of debt and equity), substantiating the historical financial records you have been provided with, reviewing forward workloads, completion of an integrated Profit & Loss, Balance Sheet and Cash Flow forecast.

Also consider whether there is there any exposure to foreign exchange or commodity price fluctuations or interest rate risk.

Finally, review the business' historical and forecasted liquidity and credit (debtors and their payment history, management of cash flow and appropriate working capital facility in place).

Other key risks to evaluate include shareholders; effectiveness of governance/advisory support; competition (who, what are their points of difference and is it likely to change?), and systems (are IT and other systems in place to provide you with reliable information which you can make good decisions?).

With so much to review carefully prior to purchasing a business, I recommend making a thorough list prior to commencing due diligence. ?

Use the expertise of a suitably experienced chartered accountant or adviser to help you undertake an appropriate level of risk analysis.

And, remember, that as well as risk, you should be looking for opportunities to grow the business and add value to the shareholders.

Steven Stark is a partner of BDO Waikato.

A: No 1: Check out whether there are any existing issues with staff, customers, suppliers and the IRD.

Take your time to investigate what you are buying and whether you can build the business and sell it for more in a few years time. Does this business generate shareholder wealth or are you simply buying a lousy job?

Challenge future revenue forecasts, what facts do they have to back these projections up with?

What are you buying? Would it be better to start a similar business from scratch?? Most business owners over value their business.

Always ask yourself if I set up in operation over the road from this business how easily could I just acquire their customers by providing better service or product offering?

If you are acquiring a customer base - investigate whether their loyalty is it to the business or the current business owner and staff. What value is going to walk out the door with existing owners?

Mark Robotham is an SME business adviser at growthmanagement.co.nz

If you want to ask our experts a question, please email jenny.keown@fairfaxmedia.co.nz

- ? Fairfax NZ News

Source: http://www.stuff.co.nz/business/small-business/7554315/Advice-on-buying-a-business

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