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Do Your Homework Before You Buy a Business

May 24, 2009

Not every would-be entrepreneur wants to start a small business from scratch. There’s a certain attraction to coming into a business that already has a location, name, permits, customers and cash flow. Moreover, compared to a start-up, there’s a lower level of risk and a greater likelihood that bankers and investors will help you obtain financing.

However, none of this guarantees smooth going. At the same time the owner is looking for a suitable buyer, you are looking for a suitable business: one that’s in good shape with a history of profitability. The risks you encounter may include obsolete inventory, uncooperative employees or outdated technology and distribution systems.

Here are ten questions to consider regarding the purchase of a particular business. Many of them apply to purchasing a franchise as well.

  1. If I am actively considering a specific business opportunity, have I assembled an acquisition team with my banker, accountant and attorney?
  2. Why does the owner really want to sell the business?
  3. What assets convey with the business? Do there seem to be more fixed assets than it warrants?
  4. How much inventory is there? For a business that sells a product, excessive inventory is a red flag.
  5. Will the owner help me learn the business and give operating help, at least for awhile?
  6. What aspects of the business are most critical to its survival?
  7. How much cash does the owner need upfront?
  8. What is the best way of financing this purchase? Will the owner help with financing; for example, through leveraging the buyout?
  9. Is the owner willing to show me projected financial statements plus the past three years’ balance sheets, income statements, cash flow statements and tax returns?

10.  Has the company or its principals been involved in bankruptcies or lawsuits?

Hiring a business broker to help you find a business will cost you a commission. On the other hand, the broker has typically prescreened the businesses. Keep in mind that not all states regulate business opportunities, and that even among those that do, definitions of “business opportunity” vary.

A number of Internet sites provide information for prospective buyers and sellers of private businesses. They include the Online Business Advisor, onlinebusadv.com, and buysellbiz.com. You can also find a variety of books, reports, reference guides and other tools at the Business Book Press Web site, http://www.businessbookpress.com.

If you would like to explore the potential of acquiring your own business, contact SCORE Lancaster “Counselors to America’s Small Business.” SCORE is a nonprofit association of more than 50 expert business counselors who provide free and confidential business counseling to small business owners. Call us at 717-397-3092 or find us online at http://www.scorelancaster.org.

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One Comment leave one →
  1. May 26, 2009 9:36 pm

    Thanks for the excellent article. I’m a business broker in the Boston area and am routinely called by buyer who are refugees from corporate America. My suggestions are as follows for finding an appropriate business:

    – Monitor BizBuySell.com daily and set up an email alert to contact you should a business that fits your criteria come on the market

    – Contact business brokers in your area and stay in regular contact

    – If you do hire a business broker, make sure that they are very clear on their fees and check references of satisfied clients

    Thanks again for the excellent information.

    Sam Liss
    Coral Group Business Brokers
    http://www.coral-group.com

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