What You Need to Know When Buying a Business
If you are looking to become a business owner during the coming year, there are many opportunities out there. For many aspiring entrepreneurs, purchasing an existing business is preferable to starting something from scratch. With an established business, someone else has already gone through the grueling startup phase, hired employees, built up a customer base, and brought the company to profitability.
If you are thinking about buying a business in the near future, you will need to do some legwork and due diligence to make sure you choose the right one. Here are some important things to consider and questions to ask as you move toward purchasing your ideal business:
What Kind of Business Should I Get Into?
With so many options out there, the first thing you need to do is narrow your choices down to the businesses that would be suitable for you to own and operate. Of course, you want to be in an industry that is thriving and has strong growth potential, but you should not make your choice based on this factor alone. You should also look for a business that you know something about and more importantly, that you are passionate about. Think about industries and types of work you have done in the past. What skills have you developed? How can your skills be applied to the business you want to purchase?
Assembling a Team to Help with the Business Purchase
Before evaluating the available businesses that you are considering, you should enlist the help of some key professionals to assist you with various aspects of this process. First of all, you will need a CPA to perform a detailed review of the financial records. You should also have an attorney on hand to help prepare and/or review the documents for the sale.
Finally, work with a business broker to help you find a suitable business for sale. Business brokers, also known as business intermediaries, specialize in matching the right buyers and sellers and to help ensure a win/win transaction for both parties. In addition, they often become aware of available businesses before they hit the marketplace, giving buyers they are working with a leg up. This is especially helpful during a seller’s market when businesses don’t stay on the market for very long.
What Exactly Am I Buying?
This is an important question that some buyers overlook. When there is a business for sale, you need to know what they are selling. The possibilities include:
- The assets of the business, such as furniture, equipment, inventory, business name, patents, trademarks, and possibly existing clientele.
- The business entity, e.g., an LLC or corporation. This could mean you are also purchasing liabilities such as debts, unpaid taxes, liens, and pending litigation.
- If the business is a corporation, you could be purchasing some or all of the stock held by the current owner(s).
It is generally preferable for a buyer to be purchasing the assets rather than the business entity or stock within a corporation. This usually means a better tax situation, although you should talk to your CPA about your specific circumstances. In addition, it is always best not to assume the potential liabilities of the business you are buying.
Examining the History and Finances of the Business
You and your CPA will pour through the certified financial records that the business owner has made available, including balance sheets, cash flow statements, accounts payable and receivable, payroll, employee benefits, employee contracts, commercial leases and other major contracts, tax information, and any other information that is relevant. This review will give you a good idea of what shape the business is in, and it will alert you to red flags that would need to be addressed before you move forward.
During this review, identify all areas of concern and prepare a list of questions for the owner to answer. Do not be shy about asking questions as it is better to answer them now rather than encountering unpleasant surprises later on. If the owner is evasive or deceptive in answering the questions or refuses to answer them at all, then this might be a good sign that it is time look at other options.
How will I Finance the Purchase of the Business?
Financing is a critical part of a business purchase, and it is important to realize that getting a commercial loan is not nearly as easy as getting a mortgage to purchase a residential property, for example. Commercial lenders often require collateral, and the application process can be extensive.
The good news is that there are a number of alternative ways to finance your business purchase. First of all, there are more lenders in the marketplace these days who specialize solely in commercial loans, and a lot of them will approve buyers who might get turned down by a bank.
There is also the possibility that the owner will at least partially finance the purchase. It is often in the best interests of the seller to do this in order to make it easier for a qualified buyer to purchase the business.
Will the Key Employees be Staying Under New Ownership?
One question you will most likely want to answer before you move on to closing the deal is what the status of the current employees will be under new ownership. In particular, you will want to know about key employees whose work is critical to the success of the business. How do these employees feel about the business being bought? Are they willing to stay and work for a new owner? Hopefully you will be able to answer these questions affirmatively.
Will the Current Owner be Sticking Around for a While?
One way to help assuage the concerns of existing employees is for the current owner to stay on for a while during the transition to new ownership. Find out how the seller feels about this and how long they are willing to continue with the business. If they are financing you, they will likely be more open to sticking around in some capacity.
Will this Business Provide the Income I Need to Support my Lifestyle?
If you have found a business that you have the skills to operate, you are passionate about, and one that stands up to detailed scrutiny during the vetting process, the bottom-line question you need to answer is – will this business give you the income you need to live the lifestyle you want? It is best to speak with an experienced business intermediary to help you prepare.
Everyone will answer this question differently. We all have our own ideas about what level of income we want to have. Be sure that the business you are looking at brings in the cash flow you are looking for, or at least close to it. Otherwise, you may be setting yourself up for disappointment.