Starting a business from scratch is not for everyone. If you are looking into becoming an entrepreneur, but don’t want to deal with all the aspects of starting up, buying an existing business may be your best bet.
It offers the benefit of an existing customer base and a well-defined market. However, it is not a decision to take lightly.
From your budget to the business operation there are a lot of things to consider before closing a deal.
Things You’d Know Before Buying an Existing Business
About the Business
While on the outside a business may seem like a great opportunity, reality can be very different. From a background check to a deep dive into the business plan and financial statements, due diligence is never to be overlooked.
A good starting point is to have a series of conversations with the current owner. Understand their reasons for selling and try to get as much information as you can on every aspect of the business.
If you feel they are not disclosing important aspects, or they are uncomfortable with questions you deem important, proceed with caution. After those initial talks, there are some steps to cover:
A first step and one that’s really important is to ask for at least three years of financial statements and tax returns. This will help you in determining if and how the business has grown.
It will also help you understand the credit status of the company. Hiring the services of an accountant may be helpful if you are not a finance expert.
Ask for a comprehensive report on the financial situation on the business and a projection for the first years after you acquire it if it is to remain operating the same way.
2# Legal Aspects
Next, it is important to determine the legal standing of the company. Inherited lawsuits are something you do not want to deal with.
For this, we recommend hiring an attorney and have they review all legal documentation: from patents and copyrights to employee contracts.
A final thing you need from your attorney is to verify industry and zoning regulations that may affect the business and to inform you of any significant changes that could shift the financial course of your new company.
Market trends and the business’ existing customer base should also be considered. Sometimes, market trend shifts can have a huge impact on the business, and they can happen fast.
So take your time to understand how the market works and what you will need to do in order to keep up with it.
Take your time to understand operation costs and processes and determine if you will be able to keep up with the company’s operational demands.
One key element is to find out if the staff will stay after the ownership change. If they will, try to understand the company culture and determine if it’s the right fit for you.
Once you cover these steps, it is time to determine if you are ready to close a deal. For that, try answering the following questions:
- Are you able to invest all the money that’s required? If you need a loan, verify your credit status and talk to your bank before making any commitment.
- If you don’t want to get a loan, you may find a partner. Is this an option for you? Do you know someone that may have the financial means to close the deal, and be a good business partner?
- Does the business align with your passions, goals, and lifestyle?
- Do you have the knowledge, experience, and skills to take the business to the next level?
Finally, make a detailed transition plan. You may want the current owner to remain on your payroll until you fully understand operational details, or you may negotiate for them to stay as counselors for a determined period.
A business mentor may help a lot in making a good decision if you feel you are still not ready. There are several organizations that offer free mentorship for business owners or entrepreneurs.
Finding someone who’s experienced in the type of business that you are planning to acquire and having a few mentoring sessions before making up your mind is a good way to avoid buyer’s remorse.
Author: John Brooks