The previous articles in this series can be read at:
- Buying an established business: Tricks and Traps - Myths and Truths
- Buying an established business: Tricks and Traps - Due Diligence
1. Will the fees transfer to a new owner?
The value of the business rests with future benefits. That is, you are buying the net income stream that you will derive from owning the practice.
The past is only relevant to the extent that it assists you to forecast future cash flows.
The key questions are therefore:
- will the current fees transfer to you as the new owner? (or will the clients/customers move with the previous owner)
- is the business transferable? (do clients/customers come to the practice or its owner?)
- what will remain with the practice to continue trading (e.g. staff, systems, stock, IP, etc.)
2. Why is the practice for sale?
You may not always get a complete answer to this question, but you should always ask.
For many practitioners, they sell the practice for retirement purposes. However, some sell because of problems with the business, local area developments, or regulatory changes. If the reason for sale will impact on the future cash flows of the practice, this should be considered, measured, and factored into your offer.
3. Can I improve the business?
This is often the primary reason to buy a business – improve it and its value.
If you pay a fair price for the practice, then the only way to create wealth, and further value, is to improve the business.
Your review of the business should always focus on areas for improvement. However, be careful that you don't pay the vendor for work that you will do!
4. What is the outlook for the practice?
To reiterate, value rests with future benefits. That is, you are buying the net income stream that you will derive from owning the practice.
Another question of focus is to consider the business outlook for the practice. This may be based on underlying growth, market trends, local area developments, and improvements which could be made.
The outlook will drive value.
5. Is the business profitable?
It is profit not gross fees that pay the bills and will repay the loan.
Any analysis of value, and therefore the practice, must focus on profitability.
The definition of profit can be a complex accounting question. That's not the focus of this blog. (We strongly recommend you seek expert advice from experienced analysts/accountants with a deep understanding of your profession before purchasing a practice)
The focus of this blog is two fold:
- (a) only buy profitable practices or those which could easily be profitable; and
- (b) ensure you personally (not just your advisers) know how and what makes this practice profitable.
These are examples of the types of questions you should ask. The precise questions will vary depending on the practice and your objectives for purchasing it.
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