If you have decided to buy a business, rather than start a completely new business from scratch, here are 10 things to consider before making an offer.
1) Why do you want to buy a business?
It’s important to understand exactly why you are looking to buy a business in the first place. Setting clear and realistic goals for the business is the first step. You may want your business to generate an income for you every year. Or you might be more interested in something you can scale up, add value to, to sell again down the line.
Having a clear goal in mind will help you more sensibly assess potential purchases. It will also be a useful tool for the business broker you enlist to help find you a suitable business.
2) Choose your industry wisely
Be careful that you have picked an industry that will help you achieve your goals, rather than being simply drawn to an industry that you like. Too many business owners let their hearts decide and let their passion guide them. Well, that can work some of the time, but overall, you want to pick the industry that is going to meet your financial and entrepreneurial goals.
Maybe you’ve always had the desire to own a record store and noticed that there are already three such businesses on the market in your area at the moment. Is it the opportunity of a lifetime, or could it be because the market for records died years ago with the advances in music technology?
The best way to learn more about any given industry is to go and work in it for a while. You may even be able to do this part-time around your existing job. If you really want to own a restaurant, spending time working as a server in the evenings. This will be the best way to test your dream. You will gain invaluable inside knowledge, which you’ll be able to put into practice in your own business when you get it going.
3) Professional help is FREE, so use it
Just sorting through all of the businesses for sale can be a daunting task, not to mention the actual sales process itself. That’s why it’s best to get professional help and guidance when you are ready to buy a business.
A business broker can help you find the right business that matches your goals and they will also assist you in navigating the sometimes treacherous waters of a complicated sale. Do you know what questions to ask the owner or what to look for in their financial records? Most buyers don’t, but a business broker does.
The best part about having a business broker on your side is that they are completely free. Yes, you pay zero commission as a buyer; the seller covers that. Some buyers in certain situations choose to engage the services of their accountant or attorney for additional consultation, and those advisors will definitely charge fees.
4) Inquire about a business that has peaked your interest
Be prepared to fill out a confidentiality agreement or a non-disclosure agreement for EACH business that you inquire about. No reputable business will disclose their name, location, financial documents, and proprietary company information to prospective buyers without one.
Once you have done that, you will have access to company information & financials. If you still want to move forward after seeing those items, then your business broker will schedule an initial meeting with the owner and a visit to the business for you.
Remember to stay subjective. Just as when you’re buying property, you need to think with your brain, not your heart. Listen to your gut feeling and don’t ignore it. Buying a bad business is an expensive mistake to make.
Confidentiality is important to a seller. Most business owners don’t tell their staff that they are selling, so as not to risk them taking their eye off the ball at a time when the performance of the business is under close scrutiny. They also don’t want their customers or suppliers to dry up in anticipation of a change of hands. Comply with these confidentiality concerns and remember to maintain a friendly and professional relationship with the seller.
5) Do a reality check
Now that you have more information on the business, you should take a step back and think it through. Do you see a good opportunity for growth? What warning signs have you seen in the business? No company is perfect, but do you have the skills to fix the problems you have seen? Can your strengths enhance this business? Can you see yourself working in this business day in and day out, because that’s what happens when you buy a business.
Does this business really reach your goals? Does it offer enough financial benefit? Will it challenge you enough as an entrepreneur?
6) Do your research
Go through every page of their website, Google their name to see what comes up, and check out all of their reviews. You want to make sure that you are seeing the whole picture, and the way this business is perceived by the public might be an important factor for its success. Or on the flip side, it could be a wonderful challenge to rebuild a struggling business and turn it around. Either way, you need to know exactly what you are getting yourself into.
7) Have your finances in order
Just as when you’re buying property, you should have a budget in mind when you start to look for a business to buy. How much cash do you have on hand to put towards it? How much would you be looking to finance? How much cash do you need for working capital?
If you are buying the business via financing, you should make sure you have a general understanding of the qualifications for borrowing. Many businesses that are listed with a professional business broker will let you know if they are pre-qualified for an SBA loan (small business loan). Also, many business owners are willing to offer private owner financing under certain conditions. Your business broker can help you find those opportunities as well.
9) Don’t be afraid to make an offer
Only once you have an accepted offer and you are under contract, will you go through a process called ‘due diligence.’ This is where you verify all the information given by the seller and delve deeper into the details of the business. If you don’t like what you find, you don’t have to move forward with the sale.
Find out why the current owner is selling and leverage it. If they want to retire, are they really going to jeopardize the sale of the business for the sake of a few thousand dollars? Push for the deal you want, but remain flexible, as you don’t want to lose the deal completely. Not that many businesses have buyers fighting over them, so as someone with cash on hand, you are in a strong position. Make an offer and see where they are really at in terms of their motivation and desire to sell.
10) What is your exit strategy?
The hope is that you’ll buy this business and have a long, successful, and lucrative career. However, there is a chance that at some point, you’ll want to sell the business, or at the very least retire.
Take a look at the business and evaluate what you’ll need to do to get it to a point where it is profitable and sellable. Know what your exit strategy is at the start so that you can always be planning for the future. Businesses that are running with an exit strategy tend to have much more success overall, even if you have no plans on selling.
Investing in a new business or growing your current business via acquisition should be a very exciting time for an entrepreneur. If you do all of your homework, prepare for it, and enlist the help of the right business broker, you will choose the right one for you.
If you are thinking about buying a business and would like free professional help, contact us today!