Business Tips from SCORE: Here's what you need to know before buying a business
Purchasing a business can be a highly profitable way to jump into the world of entrepreneurship. When you buy a business, your start-up costs are non-existent, your team is already assembled, your business has existing customers and vendor relationships, and processes are already in place. In other words, you have a huge head start towards success. Purchasing an existing business, however, does not guarantee success.
There’s a lot you need to know about a business before you buy. Below are four key questions to ask the current owner before making any business purchase.
More Tips from SCORE:Business plan is a big help when turning hobby into a business
First, you need to do your research to determine if the business is worth pursuing just like you would any other investment. It should also provide the same outcome —a significant return over time. A business can return high profits, but it’s also a riskier way to invest your savings. To mitigate your risk, study the past performance and current condition of the business. You’ll also want to consult with professionals in the same industry and those who are familiar with the business to help evaluate its prospects for the future. Gather as much data on the business as you can before you decide to purchase. The best way to do this is to sit down with the current owner and ask these four critical questions:
Why Is the owner selling the business?
Context is key to any sale. If the owner is retiring, going through a life change or selling for another purpose with complete transparency, this could be a good sign that the opportunity is worth exploring. If, however, the owner is looking to sell quickly or does not provide a clear reason for the sale, proceed with caution. The fact is that most business owners don’t walk away from profitable businesses unless they have strong personal reasons to do so.
What are the Financials?
Is the business in the red or the black? And why? Dig deep and get as much insight and context into cash flow, investments, payment terms, and liabilities as possible. The owner should be able to easily provide you with this documentation, show you the money flowing in and out of the business, and give you a strong sense of the financial health of the company.
More Business Tips from SCORE:Word of mouth marketing is key to business growth
What is the Business’ Reputation?
Perception is reality. If other businesses or leaders in the company’s industry have a poor perception of the brand you’re considering purchasing, that should weigh heavily on your decision to buy. Purchasing a business that requires immediate reputation management — whether from mismanagement or consumer mistrust in the product or service — may be a way to get a solid deal on the purchase. However, repairing a brand’s reputation requires capital and a long-term commitment to turning things around.
If you’re buying a business that you plan to be deeply involved with for years, and you’re confident in your ability to positively impact the culture, a fixer-upper business could be a steal. On the flip side, a well-respected business with an owner whose identity is deeply intertwined with the identity of the company means you’ll have big shoes to fill and your decisions as the new owner will be scrutinized.
Does the purchase include everything you need to make a seamless transition?
Make sure the purchase includes all of the essentials that you need to get up and running once the purchase is complete. This could include leases, contracts, customer lists, patents, trademarks, service marks, trade names, essential employees and any other element of what’s made the business operable and successful up to the time of the sale. Consult your partners, mentors and others you trust before jumping in.
Buying a business is a big decision that’s going to require your long-term dedication. You’re not just investing in a company or a product; you’re investing in the customers and vendors you support and in the livelihoods of the people you employ. It’s not a decision to make quickly or without insight from a small, core group of people you trust, like a SCORE mentor. A SCORE mentor can help you evaluate the business you’re considering and work with you to gather the right information to make the best, most informed decision possible.
Contributed by Marc L. Goldberg, Certified Mentor. SCORE Cape Cod & the Islands, www.capecod.score.org, capecodscore@verizon.net or 508-775-4884. Source: US Small Business Administration.