If you feel that you have the chops to become a small business entrepreneur, and you are not interested in starting an enterprise from the scratch, then buying an existing business is the best alternative decision you would be making. Buying an existing business is lot cheaper in terms of both time as well as money. It also involves less risk than starting from the scratch. Also, if the existing business is low on debt and has a good reputation and good customer base it’s easier to procure working capital and start-up capital.
However, if you do not look into certain matters carefully while taking over an existing business, it will be throwing good money into bottomless pit. And probably you will end up with lousy employees, stale inventory, and bad debt. Avoid these issues by taking into consideration the following pointers.
5 Things You Need To Do Before Buying An Existing Business
Scale Your Strengths and Experience
List down your strengths and weakness and also your experiences. Buy a business where you can utilize your experiences and leverage your strengths. When you make a list, keep an open mind and pen down every single strength of yours. Brainstorm with your close friends and family regarding the type of businesses that your skills and experiences will fit in. This will give you the much-needed valuable insights into the potential businesses you will fit in.
Put Together a Team
Once you have short-listed the type of business you want to buy, announce it to the local business community, keep an eye on the local newspaper, run your own advertisement. Attend various local business events and also network wherever you go. Meanwhile you also need to put together a team that consists of an attorney who has prior experience in the buying out the existing business, an accountant and also a business broker.
It’s always wise to have a business broker as he/she will be able to filter out the business that will fit you best. He is useful to negotiate the price. However, choose a business broker carefully.
Review Financial Statements
This is very important as it will give you an insight into the overall financial health of the business you are planning to buy. Get your accountant to study the historical financial statements and also project future financial statements provided by the existing business owner. These are known as the “pro forma” statements. These financial statements will help evaluate the value of the business you are planning to buy.
Dig Down to See the Inventory
If the business you are buying sells products, it means you have to pay for everything that is enlisted in the inventory. Therefore, its wise that you check out the items on the shelf and in the warehouse, yourself instead of taking the existing business owner’s word for it.
You have to personally go and see the condition of the inventory. Also get your professional man along to value condition of the inventory instead of going along with the owner. This will help avoid losses. Similarly, with the furniture and equipment, you don’t have to pay the price of a new one. Remember that you are getting the used ones.
Review the Legal Contracts and Documents
This is very important. Your CPA and attorney have to fine-tooth comb all the necessary documents including articles of incorporation, tax returns of the previous years, leases. Also, ensure that the contracts are valid and the financial forecasts are reasonable.
- Get the sales records for the last three to five years. This will give an insight into health of the business and the direction in which the business is heading towards.
- The attorney and CPA should check the liability lists. It will give you an insight into the money borrowed against the business assets, and also the sources of business funding they have used. You also need to find out whether there are any employee benefit claims to be settled in the near future.
- You also need to review whether the accounts receivable is good and how long these receivables have been on the books. Also, find out whether the business owner has been paying all the bills including the utility bills on time. If you notice late payments, it means unhealthy cash flow.
It goes without saying you need to check out the location of the business you plan to buy. This is important as you need to drive traffic into your business house. Buying an existing business means investing a lot of time and effort. If you have the right team and also consider the above-mentioned pointers, you will be able to take the business to the next level.