10 Things To Know Before Buying A Business
If you are planning to buy an existing business, there are several things you need to think about before making the purchase. Buying a business is a little complicated than most people seem to think and there are various issues that need to be addressed in order for you to make your choice of investment successful and more profitable. Small business for sale can be very profitable if you are able to properly structure it.
When you are evaluating a particular business option you are interested to buy, you have to know certain aspects related to the business like whether the place of the business is owned or if it is being leased, and also some determining factors that can significantly influence the price or ability of the business to earn profits in the long run.
Here are ten essential things you need to understand about buying a business.
1. Why is the business for sale?
When someone offers you to buy an existing business, no matter how attractive the selling price is, you have to know first why the business is for sale. You need to find out if the business is failing or the owner has simply lost interest and wants to retire. Or maybe there is a new competitor in the area that poses real threat to the business. Also, you may want to ask if the current owner already had offers for his or her business and ask why the deal did not push through if somebody already offered to buy it.
2. Ask for the business’ financial records for the last three years
It is not rude to ask for the company’s financial records when you are buying a business. At a minimum, you can ask to evaluate at least three years’ worth of financial statements just so you can have an idea of how well or bad the business performed during those years. It will be best to have an accountant or financial auditor go over the figures because they have the expertise to look at these statements with a fine tooth comb.
3. Evaluate the industry statistics
When buying a business, you need to know if the industry the business belongs to is stable. To understand this, you have to study the industry statistics to see if it is growing, matured and secured or gradually diminishing. Buying a business is an ultimate investment and you do not want to buy something that belongs to an industry that is slowly losing its market appeal. If the industry continues to grow and stable, it means that the business you are buying is from an established market segment that is not just a fad.
4. What value can you add to the business?
When you buy a business, you must have future plans for its growth. So if you want to grow and develop an existing business you are planning to buy, you must know firsthand how to plan to achieve it. What expertise and skills will you bring in and do you have the necessary business connections that will allow you to accomplish your plans. The value you can add to the business is a significant advantage that allows you to develop it and make it more profitable.
5. Ask about taxes, payroll, and healthcare obligations
One of the characteristics of a successful business is its profitability. You don’t want to buy a business where you will inherit financial obligations from the previous management. Make sure there are no unpaid taxes, payroll or healthcare obligations. In some states, tax authorities may come after you if you purchase a business with payroll and other business taxes obligations from the previous owner. It is best to avoid legal complications by doing your research and making sure that all financial obligations of the company has been settled before you make plans of purchasing it.
6. What contracts and other agreements are already in place?
Make sure you totally understand what you are getting yourself into before you buy an existing business. Contracts and agreements are essential to a performing business but you have to understand what these contracts are and what it contains. Does the business have existing employee contracts, sales agreements, terms of sale, supplier contracts, and rights of renewal. Depending on how these contracts were penned, some agreements may last for a number of years after you have bought the business.
7. Does this business align with your passion and skill set?
Developing a business and seeing it grow is a very tough task even for an experienced entrepreneur. So when you buy a business, you need to make sure that it is compatible with your passion and expertise. You don’t want to buy a mom and pop diner when your passion is into car parts and accessories. If you think the service or product is not within your line of expertise, then it is probably not an ideal line of business for you.
8. What are the terms of the transition period from the previous owner to the new owner?
When you are planning to buy an existing business, another important question to consider is will the current owner stay on in the business, and if so, for how long? Ask about the transition period, what will it cover, and what training is included. You also need to know which key staff remains in the business.
9. What IP and non-tangible assets will come with the business?
Buying a business does not end when you purchase the tangible assets. You are also buying an existing brand so you need to know what other intangible assets those come with the purchase so you would know if the price is ideal for its value.
10. When analyzing the price of the business - What method has the owner used?
To really know the price of the business you are buying, you also need to know the method used in calculating its value. Did the previous owner used a discounted cash flow valuation method or was the price based on existing assets? Was the price based on recent comparable sales or earnings multiple or a combination of any of these valuation methods?
Buying a business can be very profitable venture especially if you are armed with the right information. Knowing the things you should do before buying will ensure that your investment will have a chance to grow and earn you huge profits in the future.