Major Factors to Consider When Buying a Business
Purchasing an established business is a great way for many people to get into entrepreneurship. If you can afford the upfront cost or you have the ability to finance at least part of it, you can bypass the often gut-wrenching startup phase of a business; the initial weeks and months when you put in 18 hour days working your butt off to get the business off the ground.
With an existing business, all of that work has already been done for you, and you get to reap the benefits of it. Of course, this comes at a cost, and you will have to pay a premium to get into a business that is already established and making a profit.
Even with established businesses, however, there are no guarantees that things are going to work out for you. Many people buy businesses with all of the best intentions, but for whatever reason, they do not make it. With some planning and forethought, you can help ensure that this fate does not happen to you.
Here are five of the most important factors that you need to consider before purchasing a business:
Learn the History of the Business: Find out everything you can about the history of the business, both financially and otherwise. How long have they been in business? What changes, if any, have been made since its founding? Has the business had more than one owner in the past? How many employees did it start out with, and how many are there now? What mistakes have been made in the past? And what have they done that has worked well? With so much at stake, you want to know exactly what you are walking into, so learn as much background on the business as you can.
Know and Understand the Business’ Finances: Picking up on the first point, you will need an in-depth understanding of the finances of the business. This is more than just the highlights. For example, it is nice to know that a business had gross sales of $300,000 last year and a profit of $100,000. But you will also want to know the underlying numbers that brought them to this point. Thoroughly analyze cash flow statements, balance sheets, accounts receivable and payable, payroll records, tax returns, and other important financial documents. And if you do not understand all of these, enlist the help of your CPA.
Find out what contracts the business has with suppliers and other vendors, what leases may be up for renewal in the future, and any other major contracts and obligations the business may have. You will also want to know about any potential rain clouds on the horizon, such as prior or pending litigation the business may be involved in. By knowing and understanding the whole financial picture, you will have a much better idea of what it will take to maintain and build on the success the business has experienced thus far.
Understand who the Ideal Customer Is: As a business owner, it is very important to know who your ideal customers or clients are, so you have a better idea of what it will take to attract more of them. Find out detailed information about the customers, their age, gender, level of education, profession, interests, etc. You should also find out who your biggest customers are, and what percentage of your total revenue they account for. In general, it is best to have a more diverse customer base in which you are not overly dependent on the revenue generated from one particular customer or client.
Finally, you will want to learn what type of relationship the current owner has with the customer base. For some businesses, dealing with the owner is very important to customers or clients. If this is the case, you might need to have a conversation with the seller about how they could maintain some role in the business in order to help you build a strong relationship with the current customers.
Know Why the Owner is Selling: Carefully examine the reason the owner gives for selling the business. Does it make sense? Or does it seem like something doesn’t add up? There are many valid reasons for selling. Maybe the owner is retiring, stepping away to take care of someone close to them who has a serious health condition, or they want to focus their energies on a different business endeavor. Ask for details about why the owner is selling, and make sure you feel totally satisfied with the answers you are given.
Decide if This is a Good Match: Not everyone is a good fit for every type of business, and just because someone else was able to make a particular business profitable, this does not necessarily mean the same thing will happen once you take over. You have specific interests and a unique skillset. And like everyone else, there are some areas you are strong in, and some where you are not so strong. Take a good, honest look at the business you are considering, and decide whether or not this will be a good match for you.
Picture yourself working on your new business day in and day out. Does this thought excite you? Or do you dread the idea? What responsibilities are you fully confident that you can handle? What areas do you think will be challenging for you? Is it possible for you to learn or outsource the tasks that you will have difficulty with?
Work with an Experienced Business Intermediary: Purchasing a business is a big decision, and you should not face this process alone. A business broker can help you find the right business based on your passion, skills, and budget, so you go in with the best chance to be successful. Along the way, they will guide you through the process and help you avoid any of the common pitfalls that might trip you up.