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Factors to Consider When Buying a Business

July 12, 2014 | By Steve Ma. Reyna | Reply More

One way to get into entrepreneurship is by buying a business. The weak economy has provided a boost for those who are in the market for buying a business, given the wider range of available businesses to purchase.

buying a business

Pros and Cons of Buying a Business

Buying a business represent a less risky way of starting a business. But like any other choices in this world, it has its pros and cons. In another article I wrote, How to Start a Business: 3 Roads to Becoming an Entrepreneur, I discussed the pros and cons of buying a business.

Buying an existing business offers a number of advantages:

Business has a built-in track record, making looking for financing easier
Shorter waiting time for business to become profitable
Reduces the time and cost associated with establishing a new business
Much of the legwork needed to jump start the business has been done
Customer base is already established
Relationships with suppliers have been created
There may be employees who are knowledgeable about the business
If the business is doing well, your main focus will just be to maintain and grow the business

Buying a business also has its disadvantages:

Cost may be too high compared to starting your own business
Seller may present an inflated estimate of the business’ worth
Business is not performing well
There may be operational and logistical problems that will not be apparent until after the sale
Equipment and inventories may be obsolete
Receivables may be stale and noncollectable
Business may not have a good relationship with customers
Relationships with suppliers may be in bad shape
Employees may have low morale and suffer from relationship problems with the former owner
Distribution system may be falling apart
Physical location may not be ideal
Existing employees may or may not welcome you as the new owner

How to Choose the Best Business to Buy

There are a number of simple tips will help you in finding the right business to buy:

1. Start with the Business that You Know

Experts recommend that entrepreneurs looking to buy a business should focus on the businesses in areas in which they have experience. This does not imply that you should not consider other types of businesses at all. However, statistics indicates that people are more likely to attain success in those areas where they have had prior experience and knowledge. For instance if you were in the advertising business for a long time in your career then narrow your searches in businesses sale in the advertising area.

If you do not have experience in the field on this business you are thinking of buying, then you need to have people you trust who knows the business; or you need to make the effort to learn as much and as quickly as you can about the business.

2. Do your Due Diligence

Before you actually head to get a perfect business for sale, you must be prepared to do a thorough due diligence of the business you are planning to buy. Get as much information as you can about the business. It is important to have a good knowledge of the present market conditions, and how the business fares in this market scenario.

Check the licenses and permits the business currently has. Review the government regulations that affects the business, including zoning laws and environmental regulations in the area.

3. Understand Why the Owner is Selling the Business

It is important to understand the reasons why the business owner is trying to sell the business. While the owner may decide to sell due to personal, retirement, relocation or other reasons, be careful if the owner is selling selling the business due to financial considerations. If the business is not making money, ask yourself the questions:

Why is it not making money?
How insurmountable are the challenges the business is currently facing? If it’s due to mismanagement, that is something that may be easily fixed. But if the reason is due to shrinking marketplace or a dying industry, there may be no point in buying the business.
Do you think you have the knowledge, skills and resources turn it around from losses to profitability?

Most sellers are keen on getting rid of the business, and will not tell you up front. Dig deep and talk with the employees, suppliers, even customers to get a better sense of how the business is doing.

4. Know your Budget

Your budget also plays a crucial role when looking for any business for sale. The business you select will depend on how much money you bring to the table. Get a good idea of your budget range. Explore possible funding sources that you can tap.

5. Get Help

Buying and negotiating a purchase is a complicated process. Be sure that you have a lawyer who can advise you, and an accountant who can help you evaluate the value of the business. You can also use a business broker to help you find a suitable business that fits your set criteria.

The key to success in buying an existing business is to do a thorough research and determine whether the risks are manageable.

Recommended Books on Buying a Business: