Purchasing a business brings with it an array of advantages for entrepreneurs, namely the fact that the business is established and there is at least some demand for its services in the market. There is of course, with any business transaction, a large element of risk for those investors who are in the market to buy a business and it is crucial that these risks are taken into account before the transaction is complete. This is where the importance of a business plan comes into account, a document that is frequently overlooked during the purchasing process. In this blog post, we will explore how important a business plan is in buying a business.
How to evaluate a business for purchase
It is essential that if you hope to buy a business that has the potential for growth and future success, that you evaluate it thoroughly. There are many elements of a business that you should evaluate and many ways in which you can do it, but primarily this will begin with how much the business is valued at. Typically, a business takes a multiple of its profit as an indication of its value, but a business owner can also choose to make an asset-based valuation and/or conduct a discounted cash flow analysis. To gain a more comprehensive perspective on a business’s overall value, its valuation should result in a combination of some or all of these approaches.
Once the value of the business has been established, it is important to delve deeper into the core foundations that make up the company. This involves an assessment of the company’s liabilities and assets, a process known as due diligence. This appraisal will aid in establishing the commercial potential of the business in question and should include the analysis of two types of assets: all the relevant paperwork of the company and all of the physical assets owned by it. Due diligence is typically conducted after both the buying and the selling parties have agreed a deal. It is crucial that the buyer takes a look at the physical copies of all financial records and discusses with the seller how they calculated the value of their company.
The importance of a business plan
Purchasing a business is a long process, as both parties need to ensure that the transaction is the correct one. That is why it is essential that a buyer hires the help of a professional broker who can offer a more experienced hand with their professional advice. Typically these individuals are drafted in to help lighten the load of the process. The intention of the negotiations that the broker and the buyer conduct with the potential seller are focused on ensuring that the business is a viable option for purchase. In addition to the comprehensive evaluation of the business, a buyer should also analyse the business plan of the company.
The idea of establishing a business plan is usually neglected by those on the way to buy a business. The concept of buying a business is based on whether the company offers enough potential for growth in the future. This is why the creation or amendment of an existing business plan is crucial. The document will allow you to set out whether you have enough financial power to push the business in question further after its purchase and is a fantastic method for highlighting any pitfalls that may not have been seen in initial negotiations.
What to include in the amended business plan?
Much of the business plan you create for the purchasing of a business should be similar to one an entrepreneur would create for a start-up company. The document should establish a strategic plan for the business; the goals you hope to achieve. It should therefore include analysis of the marketing, operations and the financial history of the business in question – setting out what is currently in place and how they can advance after the purchase. Much of the data should have already been considered by those selling the business - individuals who may have a much greater knowledge of the market than you. There are two elements however that are essential to an amended business plan. This includes a plan for the transition of business owners, which should lay out how the purchaser will shift the relevant assets of the company over. It should also contain a plan for the exit of the existing owner, outlining the timetable and conditions in which the owner will be succeeded.
Establishing a business plan for a business you hope to purchase is a fantastic method to analyse whether it is in fact a viable option. If you would like help with putting together your business plan, get in touch today! Contact us online using the form on the right or call 01604 420 420.