Some people have long considered running their own business. They may have considered many options, including establishing a startup business. Others prefer the security of purchasing an already established company.
Those contemplating buying an established business need to do extensive research before signing any contracts. Once they determine that buying a business is a good idea, they need to take a number of factors into consideration. What type of business should they purchase? What level of profitability should the business currently have? Is there room for growth? Buying a business can be an excellent investment as long as potential buyers do their homework. Here are some of the necessary questions they should be asking:
Potential buyers need to ask themselves some hard questions about their own motives.
1. Will I enjoy this business?
While profitability is a huge concern, buyers first need to have an interest in the actual duties of running the business. If they don’t care about cuisine, they shouldn’t buy a restaurant.
2. Why am I buying this business?
Buyers need to list their reasons for buying a specific business. They need to identify all of their motivations, including profit, job satisfaction, community impact, etc.
3. Do I have enough knowledge of the industry?
Business investors may enjoy certain products or services but not have any particular knowledge of the industry. A person may love roller skating but have no idea of how to run a rink.
Business buyers need a clear picture of the business’ current financial picture.
1. What is the company’s exact financial status?
recommend asking to see audited year-end financial statements covering the last three years as well as the last three years of tax returns.
2. Are there any debts or current liens against the business?
Buyers cannot afford to be surprised by undisclosed debts or financially crushing liens. They must practice due diligence on these matters.
3. Are customers paying their bills in a timely manner?
Is the company forced to write off bad debt? As any business owner knows, invoices don’t mean much if they are not being paid.
4. Does the company have access to necessary working capital?
If the company is currently strapped for operating funds, the buyer needs to include that in their calculations. They must know how much money to borrow in order to buy the business and get it running properly.
Unresolved legal issues makes buying a business extremely hazardous. Before entering into an agreement, ask the following legal questions:
1. Is the business currently being sued or involved in any type of lawsuit?
Buyers should also question the current owner about past lawsuits. It will help them determine if business practices need to be changed.
2. What local, state or federal regulations affect the business? Are lawmakers considering changing these regulations?
Many current regulations are actually being weakened in many industries. A good attorney can counsel the buyer in this area.
Financing the Business
Lining up financing is often the biggest hurdle to buying a business.
1. How much cash can I use toward this purchase?
Some buyers will be able to pay for a business in cash, but many others will need to finance at least part of their purchase.
2. Can I get enough financing?
Any buyer needs to find a dependable source of financing that does not include personal assets, if at all possible. They may raise money through private partnerships or Small Business Administration loans or bank loans. Obviously, a good credit score is an invaluable asset.
Running the Business
Before purchasing any existing business, the investor needs to understand the ins and out of daily business practices.
1. Who are the employees? How many are there?
When someone buys a business, the staff is already in place. While the new buyer can make changes, continuity is important. That’s why they need to have the facts about the staff and understand how they operate before signing any contracts. They should ask the current owner for an organizational chart.
2. Who are the vendors. How is the business’ relationship with them?
The current business/vendor relationship is vitally important to the company’s bottom line. Before finalizing a deal, the buyer needs to know about any possible vendor issues, including late deliveries or late payments on the company’s behalf.
3. How is the company rated by customers?
Buyers should ask to see any customer feedback available for the company. In addition, they should check the Better Business Bureau ratings.
Often, buying an existing business is an excellent decision. The buyer can quickly begin putting their own vision to work. They inherit a customer base, established vendors and an experienced staff.
Buying a business is a huge commitment that requires intense research into business practices, current financial status, and financing methods. A buyer must carefully examine their own motives as well. They need to find a company that fits with their own personal goals and interests. Asking the right questions and seeking professional advice are two ways to make sure that buying a particular business is the right move.