Depending on your situation, there are beneficial reasons for buying a business.
It works for a person lacking business-ownership experience but who has management expertise, as well as for a veteran business owner.
Perhaps you’ve been laid off, or you’re tired of working for a boss.
With sufficient experience as well as training from the seller, you can create a new career.
If you’re a veteran businessperson in a new city, you might want to consider buying a business for immediate income and reputation in the community.
You want to buy out the competition to grow your market share.
You want to multiple your revenue streams, and a new business fits nicely with your expertise.
Just remember you’ll want a situation in which you run the business — you don’t want a business to run you. Get off to a right start by taking precautions.
At the minimum, consider asking seven questions:
1. How is the business positioned? It should be the right environment. The business should have the right infrastructure such as operating procedures; licensing; excellent branding, a great Web site and social media; established income; not too many competitors; and the right location or locations (see Due-diligence Tips to Pick the Best Business Location).
Use a sounding board. Get the right input from a mentor or other professionals to advise you. For example, they can help you review the seller’s representations and with designing a letter of intent to buy with contingencies — if you discover problems, you’ll want to be able to reduce the sales price or walk away from the deal.
2. Does it have positive financials? Don’t assume you’ll start with positive cash flow. With your financial advisor, analyze the tax returns and financials for the last three years.
You need to make certain that the financial ratios are favorable, and the numbers cover all your financial bases (see Financial Tips for Taking the Plunge to Buy a Business).
3. Pricing and financial terms? Make sure it’s a do-able situation for you and allows for contingencies. Decide whether it’s best to have investors, bank, SBA or seller financing.
Avoid a seller who has a strong emotional attachment with the company. Typically, such a seller has an unrealistic idea about the company’s worth.
4. What about goodwill and relationships? Obviously, you’re buying a business to avoid all the start- up hassles — from buying equipment to attracting customers.
After checking out the financials, remember your due diligence on goodwill and relationships. Make certain the company has a stellar reputation with all stakeholders –from the community and neighboring businesses to vendors.
5. What about the human capital — employees? Hopefully, you’re getting a veteran, knowledgeable team-minded staff with great soft skills. Such employees are likely to welcome your management style.
In turn, you have to make sure you develop good relationships with them and get introductions to your new clients or customers. You don’t want a situation in which customers are more loyal to employees than to your business.
6. Negative covert issues? Be sure you’re not buying a lemon. Spend time in the business.
There’s a myriad of issues that can be submerged from view such as problems with the building, the landlord, hidden debts, financial status of big customers, staff morale or workplace culture.
7. Trends and prospects? You’ll want a business in an industry with good prospects in a sector with long-term growth potential.
From the Coach’s Corner, related content:
Buy a Business to Grab Market Share but Study 10 Financials — One of the fastest ways to grow is to buy a competitor or to acquire another business. But you must exercise due diligence in 10 steps.
The 22 Dos and Don’ts for Successful Negotiations — No matter what you need to negotiate, there are easy strategies to get anything you want. But you must first remember it’s important to reach a fair compromise – with win-win negotiating skills. You’ll want both parties to feel positive after the negotiation is complete.
“Great entrepreneurs focus intensely on an opportunity where others see nothing.”