3 Factors You Need To Consider Before Buying A Business

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News Americas, NEW YORK, NY, Mon. Jan. 11, 2021: For many people in the Caribbean, starting a business is one of the best ways to gain financial freedom, but not everyone is able or willing to start a business from scratch. This is also the reason why some people would rather buy a business instead. This is an especially enticing option when you purchase an established business, since you’re also going to gain access to the products, employees, a business model, and a customer base of that business. In order to determine whether a business is going to be a good purchase, you first need to consider these factors:

Established Business vs Growing Business

Business investors need to determine whether they plan to buy a successful business or a business that can be improved upon. This depends on the investor’s familiarity with the industry that the business operates in. Successful businesses cost significantly more money to purchase, but they are more likely to be stable. A successful business is more suited for business investors who are venturing into a new industry or those who do not have much experience with growing a business. In contrast, seasoned business investors are going to gain more profit from purchasing and improving a weak business because they cost significantly less to acquire. This is even more profitable if the business investor has other businesses that have technologies or products that can be used to bolster the profitability of a weak business.

Industry and Business Health

Not all industries are profitable. The health of an industry varies depending on the circumstances it operates in. A perfect example of this is in how the travel and airline industries have plummeted during the COVID-19 pandemic, while eCommerce has drastically grown.  Investors typically want to narrow their search to businesses within industries that are either flourishing or soon-to-flourish.

It’s also important to consider the health of a specific business. Even when a business investor is looking for a business to improve upon, they need to assess whether the resources it’s going to cost to make a business profitable are actually worth the net gains.

A sure way to determine the health of a particular business is to hire a domestic due diligence expert like the ones from the Diligence International Group to assess the actual state of a business as well as the sustainability of earnings. This also reveals whether a business has been compliant with tax filings, whether the accounts receivables are actually collectible, and whether their declared fixed assets actually exist.

Shares vs Asset Purchase

Buying the business shares essentially means that an investor becomes the new owner of a business. The business remains its own legal entity (it retains its name) and all the debts and legal liabilities carry over to the new owner.  With an asset purchase, an investor acquires assets such as equipment, vehicles, client portfolios, and inventories, and registers them under a different legal entity (a new business name).

A stock purchase is a good option if the business has a good reputation that’s difficult for a business under a different identity to re-establish, and if its debts and obligations are manageable. An asset purchase is the better option if an investor wants to avoid future complications with legal liabilities.

Note: An asset purchase does not guarantee an exemption from future liabilities. It’s important to do a due diligence check on assets to ensure that they aren’t declared as securities for loans and liens. Banks may claim these assets later on if the business owner fails to pay its dues to the bank.

It’s easy to get lost in the complexity of choosing a business to purchase. These three factors are the barest essentials that any business investor needs to consider when buying a business safely.