Instead of starting a business from scratch, many investors prefer to find an already profitable existing company. By doing so, they forgo the process of having to obtain new customers, as well as the hassles involved in any startup endeavor. However, there are many questions that should be asked prior to buying a business. One of the main questions should be; “What is the reason for selling the business?”
An owner retiring is a good reason, but some business owners sell for other reasons. Therefore, it’s best to use caution as an investor to avoid buying a business that is destined to head straight downhill. There’s nothing worse than the thought of entertaining an offer of buying a company that is sliding down in profits due to external factors or new competitors.
These are 5 Pointers to Remember in Buying a Business:
1. Consider whether the business is a product or service. Service businesses are more risky because there is no guarantee that the customers will stay loyal to you after the sale of the business. They have a rapport with the current company so if you go in changing things they may jump over to another company.
2. Dig deep to find potential problems. Discuss any hidden issues up front. Lawsuits, liabilities and any corporate debt will become yours to take care of. That also includes warranty issues and claims. These things can be worked out ahead of time, but you don’t want to buy a business that comes with any surprises.
3. Ask about seller financing. Paying the owner means that you will have some leverage in case you acquire the company only to find out something later on, like a new liability or lawsuit that wasn’t disclosed in the original agreement. It will also encourage the owner to help you, because he or she will want you to succeed. That way you can repay the debt of buying the business.
4. Make sure you understand the business and its industry. If not, make the seller stay on board to give you a thorough understanding; from bottom to top of operations and management.
5. Predetermine the price you’re willing to pay and stick to it. The seller is motivated to sell a business just as much as someone selling a home, car or anything of value. Therefore, they may try to talk you into spending more. Don’t get in over your head; you can always walk away if you think the asking price of the business is too high.
There’s always going to be pros and cons to buying a business. Make sure you understand every detail and are thorough in your analysis of its profitability, business model and even the operations.