There are many different reasons as to why you someone might choose to buy an existing business over starting their own. For one, its staff will have the necessary skills, and it’ll also have a loyal customer base already in place. The possibility of growing cash flows is also high.
With the many businesses for sale on the market today, you need to be certain you’re making the right decisions. Don’t just make the purchase blindly. Make sure the company you choose to purchase has the ability to pay back the investment cost and offer returns.
As such, you’ll need to look beyond the purchase price. Ask yourself these questions.
#1. Will The Demand for Its Products Persist in the Future?
In as much you have a passion for a given business, is it able to make money? If you purchase the wrong company, it doesn’t matter how good or smart you are. In most cases, you won’t be able to revive it.
Any business you buy should be competitive. In fact, it should have an established competitive advantage. This competitive advantage could be a location. For example, if you are looking for businesses for sale in Miami, you may find that certain industries do extremely well in this area.
Take your time to analyze its market. What are the changing trends in this market? Only make the purchase once you are certain you can maintain and grow its market.
#2. Are there Financial Skeletons in The Business?
Financial statements are kept secret by the management. However, don’t agree to negotiate the price until you interrogate these statements. Where possible, compare these statements with the tax returns the company files.
Alongside these financial statements, ask for other legal documents and contracts. They may include the lease agreements, the employees’ contract, and suppliers’ contract. Have your attorney check the provisions on these agreements as part of your due diligence.
Be as inquisitive as possible. In smaller businesses, the owners won’t have many problems in answering your queries. However, if the seller is in a ‘shoe-box’ or cannot provide the data you seek, that should be a red flag. It’s an indication that the business may not be in a good position.
When valuing the business and its stock, ensure everything is itemized and valued separately. The exercise should be done by a neutral party in presence of your valuation expert and that of the seller.
#3. What’s the Purpose for Your Purchase?
Most people make the mistake of buying a business solely for money. Sure, you want to increase your revenue streams. However, don’t make the purchase without a long-term plan.
If you don’t have a plan on how to manage and grow the business, you won’t succeed.
Don’t waste your time and money.
#4. Are You Able to Operate and Run This Business?
Very few firms will be your best bet for investment purposes only. But why? Put simply, your business cannot run on its own. It’s not a passive investment like real estate.
But what if you hire an expert to manage it? Well, it doesn’t matter. You’ll still need to be present to ensure it succeeds. As such, buy a business you can commit yourself to every day.
#5. Why is the Business on Sale?
You need to ask why the sellers are selling their business. Are they relocating? Maybe they want to retire? Alternatively, they may not have the funds to make the business competitive.
Knowing why the owners want to sell the business will help you evaluate whether it is financially sound or not. For instance, if they are moving out due to low sales, will you be able to reverse the trend? If yes, how do you propose to do so?
Also, ask the sellers about the strategies they’d employ in managing the business if they don’t sell it. Remember, if you buy a failing firm, there is a possibility that you’ll fix it. However, there is also the likelihood that you won’t.
#6. Can You Separate the Business from Its Owners?
Some businesses will be successful and profitable because of their owner. This very common in legal and medical related business such as law practices and medical practices. If you’re buying such a business you’ll need a strategy on how to manage it.
You may ask them whether they are willing to stay in the business and help the transition so that the clients feel comfortable with you. If they yes, you will likely be successful, but if they are not interested in this, then it may be difficult for you to successfully purchase and run this type of business.