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What You Need To Know Before Buying A Business – Buying an existing business is a very different venture than starting your own. And it is important to carefully consider all the pros and cons and know what to ask, both yourself and the business owner, exactly the right questions before finalizing a purchase.
Just like starting a new business from scratch, not taking the right preliminary steps can result in poor performance and even closing shop. So take a look at these questions to get you started on the right foot.
What You Need To Know Before Buying A Business
Before we jump into the specific questions to ask when thinking about buying a business, let’s review some of the basic pros and cons of doing so. Many entrepreneurs are torn between starting their own and buying a business, so I hope this section clarifies a few things.
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It’s already a proven business model – it’s probably the most compelling. Buying a business that has been successful for years means that the model and customer base are established, making future success more likely.
It’s easier to get started – again, a proven business model means you can take a lot out of the initial equation: business plan, market research, marketing, location planning, etc. Sometimes fewer options make everything a lot easier.
Established branding – establishing a brand is one of the most challenging, time-consuming and expensive aspects of running a business. It takes creativity, ingenuity, and often years to get a brand off the ground. Buying an existing business means you don’t have to worry about it.
Easier to get financing – Banks and other lenders are more likely to offer loans to businesses that have a proven track record. Securing loans for additional locations or store improvements will be much more realistic if you are buying an existing business.
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You have an instant customer base – although some buyers may leave after the business is transferred to a new owner, the vast majority are likely to stay (as long as nothing significant changes). Securing a solid customer base takes a lot of the unknown out of the equation.
It can be expensive – buying a successful and proven business will come with a high price tag. All the advantages mentioned above will make your success more likely. You get what you pay for, and in this case, you’ll be paying a lot.
You may need to make some big changes – Even if you’re buying a successful business, there may be changes you want to make. These may be expensive, met with hostility from existing employees, or difficult to implement.
The business can be downright hateful – with proper research and due diligence it’s unlikely you’ll mess up, but there’s still a chance the business won’t be as successful as advertised.
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You lose the ability to be creative – much like buying a franchise, buying an existing business takes some of the fun out of making it your own and adding character.
Okay, now let’s turn to the questions entrepreneurs need to ask to start this process. And before you talk to the business owner, you need to check with yourself to make sure you’re making the right decision.
This is the most important. You should consider the list of pros and cons above and figure out which option is better for you.
If you have narrowed down your list and have a few businesses in mind that you are thinking of buying, ask yourself why exactly you want to buy this business. Don’t let yourself be trigger happy and buy any business that comes your way. Make sure it’s one you’re passionate about.
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This is another important one. You can lean on your years of experience all you want but it’s always helpful to get advice from the people around you. Ask friends and family for their input.
Once you feel confident about your motivations, and know exactly what you’re looking for, and have found a viable option, it’s time to ask the existing business owner some questions.
While some of you are looking for businesses that need fixing, many are looking to buy an established and successful business. So with that in mind you should ask them what they are selling. They built the company, made it successful and return a large profit. So what gives? This may help you spot some red flags early in the process.
Of course, you’ll want to know how long the business has been around and a little about its history. Talk to the current owner about how it got started, his role in running the business and some of the obstacles they’ve had to overcome. Of course, it’s great to buy an established and proven business, but it will come with a higher price tag.
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While every aspiring business owner knows that it will take a lot of hard work and persistence to succeed, it is still important to have at least some work-life balance. Find out more about exactly what your role as an owner will look like. It will also allow you to better plan hiring and scheduling down the road.
Even as the business owner you will still have to pay yourself a salary. It is important that you set this expectation from the beginning to know if it is possible for your current personal financial needs.
While talking about money is rarely fun, of course, it is essential to do so during a business acquisition. You’ll need to go into a little more detail to determine how effective the action really is.
This is the one to start with. A business owner trying to sell the business at a fair price will have no problem letting you look under the hood and see how profitable the sale is.
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You want to be sure that all the accounting has been handled accurately and legally over the years. Make sure all tax returns, cash flow, balance sheets, payroll, write-offs, etc. add up and don’t look fishy. You don’t want to buy a business that is secretly cooking the books.
If you’re not sure how the financial end of things looks, don’t be afraid to offer a review from someone who isn’t involved in either party. If the owner doesn’t agree to it, that’s a definite red flag. An external audit is the surest way to get an accurate valuation of the business.
You want to know about all the liabilities and assets that may come with the deal. On the debt end, this can include mortgage rates, leased equipment, ordering contracts, and more. Assets may include owned equipment, existing inventory, brick and mortar locations that are paid for as well as some intangibles, such as brand recognition.
You also want to cover some legal bases to make sure you’re not blindsided by anything once the keys are handed to you.
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Most businesses require permits. Some require a considerable number of them. Make sure you know exactly what you’ll need and how to apply for them. The existing owner should be able to walk you through everything.
Buying a larger business probably means you keep at least some of the existing staff. It is important to know who is who and which employees you can rely on in a leadership role.
You will likely need to finance a small business purchase, even a single location operation. Discuss this with the seller and learn what financing options are available. Most owners want the sale to be completed within a few years, but this will vary by seller.
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Michael has long focused his writing on the retail and small business world. He has been part of the POS KORONA team since 2018 and loves helping entrepreneurs find ways to adapt and succeed. In his spare time, you’ll likely find him traveling somewhere in the Southwest.
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