“What you’re buying is not a client base. What you’re buying is a first meeting with those clients.
“And even then, they might just go like, ‘Oh, you’re not ‘Dave’. I don’t like you. I’m gonna leave this business.’”
Harith suggests negotiating a transition period with the outgoing owner to introduce the new owner to clients.
He also encourages buyers to calculate what they’ll really be earning, as he’s seen people pay large sums to buy a business, only to find they’ve just bought themselves a poorly paying job.
“When you do the math, they actually end up working for less than minimum wage, despite having paid all that money.”
Financial due diligence is critical, but Harith urges buyers to not only get financial statements going back at least three years, but current year-to-date figures.
“Definitely insist on that monthly P&L [Profit and Loss], because from the monthly P&L, you can see how the business is doing more recently … things could have fallen off a cliff”
Harith says buyers should also ask for a cash flow statement, which can reveal outgoings that aren’t captured in the profit and loss – including loan repayments and payments towards tax debt.
“The cash flow statement will also show you … how good their clients are at paying on time.”
If a seller won’t provide enough information to do that due diligence, his advice is simple, “If a vendor is being cagey … just walk away.”
Harith also recommends simply asking why the owner wants out.
“If someone has spent years building up a business to the point that it earns them passive income, why would they sell it?”
Watch or listen to the full episode of The Prosperity Project for more.
The Prosperity Project is hosted by Nadine Higgins, an experienced broadcaster and financial adviser.
Follow the show at iHeartRadio, Apple Podcasts, Spotify or wherever you get your podcasts. New episodes are released every Monday.