Building a business from the ground up is a huge (and often costly) undertaking, and the challenges new business owners face can be daunting. So buying an existing business, with the reduced startup costs and an existing customer base that comes with it, is a much more attractive option.
Buying an established business might sound like the perfect way to jump into small business ownership, but there’s also the possibility of it being a disaster. If you don’t do your homework, that is. Make it your mission to get the real scoop on the business before you even think about shaking hands on the deal, and you’re much more likely to succeed.
Here are some of the most important things to look for if you’re thinking of buying a business:
Why is it up for sale?
There are a ton of reasons for selling a business. Even a thriving business. Could be a relocation thing. Or retirement. Or a dozen other reasons. And sometimes business isn’t booming – and the owner is ready to bail.
Even if it is for sale because profits have nosedived, you might have just what it needs to turn it around (though you’d better be sure of it if you’re planning on taking that chance). A more profitable business will have a higher purchase price, so consider how much of a risk you’re willing to take.
Don’t just assume that the existing owner is being completely honest about their reasons for the sale, you might have to do some digging, and possibly go on your instincts (scary, but a little exciting at the same time, no?)
Crunch the numbers
You need to be confident about the financial health of the business, but how do you see through the smoke and mirrors to get to the true value? Enlisting the help of an accountant is a good place to start. Your accountant will be able to spot any hint of ‘creativity’ included on the balance sheet.
Obvious things to look for include assets being exaggerated, debt older than time itself (the more aged, the less likely you are to ever see it), and negative cash flow. Get audited financial statements and tax returns from a CPA, not just the business owner’s assessment, and don’t be afraid to question anything and everything you and/or your accountant aren’t crystal clear about.
Understand your potential customers
Never underestimate the value of knowing your customers—and that includes potential customers. The fact that the business comes with an existing customer base is a positive, but will they continue to buy from a new owner? What can you tell from the business’ overall customer history? Has it dwindled over recent years? Or is it growing at a steady pace?
Do a handful of customers make up the business income, or is the customer base wide enough to support losing some in the takeover? A little analysis will go a long way in helping you decide if it’s the right investment.
If at any point something seems off during your due diligence, trust your gut and walk away. The right business opportunity will come along. Trusting your instincts will save you both time and money in the long run.