1) The Bottom Line Meets Your Financial Goals
First thing’s first: you want to make sure that the business makes enough profit to meet your financial goals. This part is actually pretty simple. Look at the numbers. Is the owner benefit that this business offers enough for you? If you are buying this business to support your family, is the owner benefit sufficient to cover all of your personal bills and expenses? If you are acquiring this business to add onto or build your current business, is the owner benefit worth the capital investment? Take a good hard look at all of the different factors and decide if the past performance of this businesses corresponds with what you’re looking for.
As the buyer, you need to make sure that the numbers add up and check out. In order to do that, take Due Diligence seriously, so you can make sure that you are actually getting the business you think it is.
2) Due Diligence Checks Out
The whole point of Due Diligence is to verify that the information provided by the seller regarding the business is correct. In most states, the law follows the idea of “caveat emptor” or “let the buyer beware.” It is the responsibility of the buyer to make sure that the financials add up and all of the claims that the seller has made about the business are true. You will have the chance during Due Diligence to ask any and all questions that you have about the business and request to see evidence to prove the seller’s representations.
A buyer certainly has the opportunity to consult with 3rd party professionals for advice regarding the Due Diligence items requested and received. A CPA and in some cases an attorney are retained by buyers for assistance during this process. You don’t have to use professionals for Due Diligence, it is ultimately your choice. It is advised, but if you are comfortable looking at financial documents, leases, employee contracts, etc then you may elect not to engage professional assistance. If you do choose to hire professional help, please make sure it is a CPA or Attorney who has experience in the specific area of business sales. Your average family Attorney or CPA won't have the expertise you need here.
At the end of the day, it’s the buyer who needs to be comfortable and happy with the business. So, you can take the advice of a CPA and/or attorney or not, but you should be making the decision to move forward out of Due Diligence with a complete picture of the business. You will ultimately need to make your own decision about whether or not you want to purchase this business, and you should be moving out of Due Diligence confidently. If you have doubts or are uncomfortable about anything you have uncovered during Due Diligence, listen to your gut, and seek professional advice. You can always cancel the contract and receive your deposit back if you are unsatisfied.
3) There Is Potential For Improvement
Buying an existing business will give you immediate income, as compared to starting a business from scratch. Based on the seller’s past performance, you can expect to make a certain amount of discretionary earnings, if the business is run in the same manner as the previous owner did. Learning from the seller as to how they have made their business successful in the past is important, because they have gone through trial and error, and they know how to make it run so that it produces the amount of discretionary earnings that you are seeing today. However, a new owner should also walk into the business with fresh eyes, lots of energy, and new ideas on how to improve it.
When you look at the business opportunity that you are considering, do you see areas for improvement? Do you recognize places that you can bring in your own expertise or ideas to make the business more profitable or more efficient? How can you take what the owner has built, preserve it, but then take it to the next level? Savvy buyers look for a business that has an acceptable owner benefit, then create their own business plan on how to elevate the performance of the business. So, take the time to analyze the potential in the business, so that you can decide if there is room to grow.
4) You Have The Capacity To Run The Business
You will want to take an honest look at the business that you are considering, and ask yourself, “Can I realistically run this business?” What type of background, experience, and skills are necessary to do the job? Some industries, like construction, require the business owner or a key employee to be licensed by the state for their particular trade. Furthermore, if you are seeking an SBA loan to purchase the business, one of the major qualifiers that a bank looks for in approving the loan is that the buyer has experience in the industry or related business management experience.
We want all of the buyers who purchase a business with our help to be successful in their new endeavor. Undoubtedly, all buyers who purchase a business believe that they will find success, or else they wouldn’t be buying it. It is important for you to be confident that you have the ability to run the business, so that you will find the success that you are looking for with your new business.
5) You Are Passionate About The Business
We spend a big part of our lives working, so doing something we love is a great bonus if you can make it happen. As an entrepreneur or business owner, our business is so much more than a job: our business encompasses much of our time and attention. So, when considering a business to purchase, ask yourself this question: “Can I love this business?”
Being passionate about the product or service that the business delivers is the key to not only making you happy, but also keeping your employees motivated, and your clients satisfied. Especially if you are in sales. Sales is simply a transfer of enthusiasm, so you or any of your customer-facing employees have to be passionate about what you do, in order for your business to thrive.