Thinking about purchasing an existing business? Here are some things you should know before you take the plunge.
For some people, buying an existing business is a better option than starting one from scratch. Why? Because someone else has done much of the legwork for you, such as establishing a customer base, hiring employees, and negotiating a lease. Still, you’ll need to do some thorough research to make sure that what you see is what you’ll get.
1 – What Type of Business Should You Buy?
Look for a business that has some connection to types of work you’ve done in the past, classes you’ve taken, or perhaps skills you’ve developed through a hobby. It’s almost always a mistake to buy a business you know little about, no matter how good it looks. For one thing, your lack of knowledge about the industry might cause you to overpay. And if you do buy the business, you’ll have to struggle up a steep learning curve afterward.
But do try to choose a business that you’re excited by. It’s easier to succeed in business when you enjoy the work you’re doing.
2 – Finding a Business to Buy
As you begin your hunt for the perfect company, consider starting close to home. For instance, if you’re currently employed by a small business you like, find out whether the present owner would consider selling. Or, ask business associates and friends for leads on similar businesses that may be on the market. Many of the best business opportunities surface by word of mouth — and are snapped up before their owners ever list them for sale.
Other avenues to explore include newspaper ads, trade associations, real estate brokers, and business suppliers. Finally, there are business brokers — people who earn a commission from business owners who need help finding buyers. It’s fine to use a broker to help locate a business opportunity, but it’s foolish to rely on a broker — who doesn’t make a commission until a sale is made — for advice about the quality of a business or the fairness of its selling price.
3 – Research the Business’s History and Finances
Before you seriously consider buying a particular business, find out as much as you can about it. Thoroughly review copies of the business’s certified financial records, including cash flow statements, balance sheets, accounts payable and receivable, employee files, including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information.
This review (lawyers call it “due diligence”) will not only help you understand how the company ticks, but will alert you to potential problems. For instance, if a major contract like a lease prohibits you from taking it over without the landlord or other party’s permission, you won’t want to finalize the deal without getting that permission. Don’t be shy about asking for information about the business, and if the seller refuses to supply any information, or if you find any misinformation, this may be a sign that you should look elsewhere. For an extensive list of questions you’ll want answered before committing to a purchase, see The Complete Guide to Buying a Business, by attorney Fred S. Steingold (Nolo).
4 – Closing the Deal
If you’ve thoroughly investigated a company and wish to go ahead with a purchase, there are a few more steps you’ll have to take. First, you and the owner will have to agree on a fair purchase price. A good way to do this is to hire an experienced appraiser. Next, you and the business owner will agree on which assets you’ll buy and the terms of payment — most often, businesses are purchased on an installment plan with a sizable down payment.
After you have outlined the terms on which you and the seller agree, you’ll need to create a written sales agreement and possibly have a lawyer review it before you sign on the dotted line.
One good resource is The Complete Guide to Buying a Business, by attorney Fred S. Steingold (Nolo), which contains a fill-in-the-blank sales agreement.
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