Four things you need to know and do before buying a business
Many people enter the world of entrepreneurship by starting their own business. It’s a great way to get started and can herald significant returns with the right idea, approach and plenty of work.
But what if you don’t have a business idea? Or don’t want to start one from scratch? Buying a business, if you have the money, can also be a great way to get started in the world of commerce.
There is a lot of responsibility when it comes to buying a business. You are taking over the leadership of the business from the previous owner, and you will still need to make your mark.
Of course, there are some benefits you can expect to get when you buy an existing business too, such as transferring a built-in customer base and intellectual property. Always remember, though, that you will still need to do a lot of work before and after buying the business.
To help you make the right decision, here are four things you need to know and do before buying a business.
1) Why you’re buying the business
The first thing you need to ask yourself when considering a purchase is “Why Am I Buying This Business?”
Here’s what one business owner explained to use about his motivation for buying a business:
“When I was purchasing the business, I was working as a GM of a division in another company. I was well conversant with the inner workings of the business, and I had total belief in the customers and offering. I was fully convinced that I was going to grow that business as the CEO.”
Buying a business is a significant investment. Why are you looking to buy the existing business? The answer should not simply be for financial purposes or to become a boss.
Consider whether the business in an industry you have a good understanding of. You don’t have to know everything about the business you are looking to purchase, but it will help considerably if you are familiar with the industry. If you not you’ll have a steep learning curve.
Other questions to ask yourself include:
- How am I going to benefit from this purchase?
- Is there an already proven concept?
- Are there loyal customers?
- Does it have a strong revenue?
- Is there a demand for the business and what it offers?
- How long has the business been running?
- What’s the leadership like?
- What is needed to operate the business?
- Do I have to hire more employees?
- Do I need to lease more space?
- Are there permits that I have to file to stay in operation?
- Do I feel passionate about the business?
Don’t be afraid to ask the seller why they are selling the business, too. There are different reasons why people decide to sell a business. If they give you a suspect reason, then you need do a little more research.
2) Do due diligence by working with an accountant and attorney
There are always some involved when you purchase a business, even if you are confident that it is the right match for you.
That’s why it’s important to do due diligence and learn as much as you can about its background. And to do this properly you need professional help. So it’s a good idea to hire an accountant and attorney to help with the process.
Accountants can help you understand more about the financial background of the company, evaluating past financial statements, and determining the costs that will be involved in purchasing the business.
Attorneys, meanwhile, will help you gather and draft key documents. Some of them include contracts and leases, tax returns, a letter of intent, and a certificate of good standing. The letter of intent is issued by the seller once both parties have agreed on the price.
3) Where finding will come from
After buying a business, many entrepreneurs need more capital. Some have taken a second mortgage out of their homes to get the extra capital. Another option is bootstrapping the purchase. While funding a business this method requires strict budgeting, it can be done.
If you aren’t ready, willing or able to apply for a loan then you can look at other funding options, including borrowing from family or using your personal savings.
4) Preparing the sales agreement
This is the moment that you have been waiting for: closing the deal using a sales agreement. You need to work with your attorney closely when it comes to creating the documents. Before signing the paperwork, let your attorney go through them and review the terms.
Once the necessary documents have been signed, the deal is done and you are now a business owner, with all the challenges and successes that come with that. Congratulations!
Photo by Austin Distel