February 20, 2020

Meticulous Research is a Must When Purchasing an Existing Business

for sale by owner

It’s been said that there are no shortcuts to success, but that’s not entirely true when it comes to owning a small business. Many entrepreneurs bypass the costs and challenges of the start-up process by purchasing an existing small business, complete with its own brand, facilities, employees, and customers.

Although purchasing an existing enterprise can immediately put you in the owner’s chair, figuratively speaking, a lot of upfront research is necessary to ensure that this is indeed a wise move from both a personal and business standpoint.

Local newspapers and websites such as BizQuest and BusinessMart make it easy to track down small businesses for sale. As you cull through the ads, be sure to do some research about yourself as well:

  •         What are my interests? If you have no idea what business you want to invest in, eliminate those that are of no interest to you.
  •         What are my talents? Being honest about your skills and experience can help avoid unrealistic business ventures. Some current employees of a business you’re interested in may possess skills you lack, but there’s no guarantee they’ll stay on after the business changes hands. Even if they do, they may want more compensation or other benefits.
  •         What are my conditions for owning a business? Consider potential “deal-breakers,” such as a business’s location, complexity, and time commitment.

Once you’ve found a business that meets your starting criteria, you need to learn everything about it—how it has performed, the current market environment, prospects for the future, etc. In many respects, this step requires the same amount of time and effort that’s necessary to research a start-up, no factors should be overlooked.

For example, a restaurant may occupy a high-profile location, but the landlord may be on the verge of raising the rent or selling the building to make way for new construction. A seemingly profitable manufacturing operation may have obsolete equipment or waste disposal processes that no longer comply with new regulatory guidelines.

A similar degree of due diligence is required to determine a fair and equitable selling price for the business. All available documentation should be examined closely—tax returns, financial statements, employee files, contracts and leases, permit requirements, licenses and patents, etc.

Don’t assume that everything “looks OK.” An attorney can help sift through the legal documents, while an accountant can perform a thorough evaluation of the business’s financial condition.

The seller may also have conditions for the sale, such as ownership of the name and brand, assets that don’t convey with the sale, confidentiality and non-competition stipulations, royalties on certain products, client list restrictions, etc.

Should all the pieces fall into place, work with an attorney to draft or review the terms of sale, known as the sales agreement. Legal counsel is also helpful when you get to the final steps of closing a business to ensure all the documentation is in order and all expectations of the transfer are met.

Related posts