Becoming a business owner can be the fulfillment of a dream, or the beginning of a nightmare. So when you are considering purchasing an existing business, how do you know if it is a good investment? This can only be uncovered by doing your due diligence. 
When investigating the viability of the business you are considering, there are five important factors to examine:
Assets/Liabilities: What is the value of the combined assets of the business? This includes any real estate owned, office furnishings, machinery/equipment, vehicles, etc. What (if any) debts have been incurred to pay for these assets? Can the financing of these assets be restructured to lower your fixed expenses and thus increase your monthly profits?
Fixed/Variable Expenses: Fixed and variable expenses need to be looked at to see if there is any potential for savings and/or if there will be any price increases in the future. For example, if the business has an office lease about to expire, what are the likely terms for renewal? In many cases, you may have to plan on some future cost increases in this area.
On the other hand, there may be opportunities for savings in areas such as phone/Internet costs, copy machine leases, etc. It is important to have a good idea of what your expenses will look like in the near future, and if they can be easily covered by your sales.
Sales/Profits: Sales and profits are a major driver in determining the value of a business. Ask for detailed numbers from several years prior; this will allow you to see their average monthly profit and which way sales are trending. If they are trending down in recent months, this may be cause for concern.
Business Growth Potential: The numbers alone are important, but they do not tell the whole story. You will also need to look (objectively) at some of the intangibles to determine if you can realistically expect sales to grow in the future. These include:
- Location
- Market Competition
- Area Demographics
- Industry Trends
- Existing Employees
You will also want to know the value of the business owner in the growth of the overall company. For example, if you are considering buying a CPA practice, how important is the owner in retaining/growing clientele?
Available Ongoing Support: It is important to know what kind of support the present owner will provide to ensure a smooth transition. Also, if the present owner is important to the credibility of the business, you may want to officially retain his/her services (if only in a consultant role) to reassure the existing clientele that very little has changed with the new ownership.
These are some of the critical areas to examine when buying into a new business. Working with a business broker that is familiar with the type of industry you want to enter can also be very helpful. Business brokers have vast experience with the typical issues that come up between buyers and sellers, and can help you prepare ahead of time so you can start off your new business venture on the right foot.
