The Do’S and Don’Ts of Buying a Business
Businesses are bought and sold all the time. Buying a business can be an overwhelming task. After all it is a big investment. There is a lot to research to ensure you find the best investment for yourself. I have put together some Dos and Don'ts of buying a business. They are as follows:
Do find out why the business is for sale. The best position for an owner selling a business is to sell the business before it has reached its peak. The benefit to the new owner is the chance to experience growth and reap the profits.
Other reasons people sell their businesses include life changing events like retirement, divorce, or illness. Buying a business from an owner desperate to sell can be advantageous when negotiating the sale price.
Be wary of a business that is selling because it's under performing. Why would you want to buy someone else's problems?
Do write a business plan and include a budget. Even though you are purchasing an existing business, you will need to have your own business plan. You will probably want to implement some changes when taking over the business. A business plan is a great roadmap and later on can be used as an evaluation tool to measure success.
Initially assessing what changes need to be made and planning for them can help when it comes time to negotiate price. If there are a lot of things that need to changed or upgraded, your purchase price should reflect that.
Concerning the budget, a common mistake that new owners often make is that they do not create a budget of their own. They copy-cat the previous owners budget. This may not be the best way to do things particularly if a certain expense seems high. Do your research and do what makes financial sense for you.
Do an analysis of financial records. Review the last 3-5 years of past financial documents for the business you are considering buying. This is common practice these days. You may delve farther into the past but it may be less reflective of what is happening in the present economy. Let your accountant review these documents as well. Check to see if the financials are accurate, detailed and up to date. If not, this may be a sign of financial distress the owner may be trying to conceal.
Don't act too soon. What is shown on paper may differ in reality. Also, you need to decide if particular business is the right fit for yourself. You need to determine what kind of role you desire to have in the business. Will you be an absentee owner or a hands-on owner? There are certain types of businesses that allow for absentee owners and there are certain types that require a hand-on owner. Does the business coincide with your personal goals? It is important to align your objectives with the appropriate type of business.
Don't assume things remain the same. During my time in this industry, I've seen a lot of businesses change ownership. A common mistake new owner's make is that they assume everything will remain the same when the business transfers ownership. People are not always so receptive to change. Expect some turnover. Key employees may quit. Also, you may need to build relationships with current or new vendors.
Do find out why the business is for sale. The best position for an owner selling a business is to sell the business before it has reached its peak. The benefit to the new owner is the chance to experience growth and reap the profits.
Other reasons people sell their businesses include life changing events like retirement, divorce, or illness. Buying a business from an owner desperate to sell can be advantageous when negotiating the sale price.
Be wary of a business that is selling because it's under performing. Why would you want to buy someone else's problems?
Do write a business plan and include a budget. Even though you are purchasing an existing business, you will need to have your own business plan. You will probably want to implement some changes when taking over the business. A business plan is a great roadmap and later on can be used as an evaluation tool to measure success.
Initially assessing what changes need to be made and planning for them can help when it comes time to negotiate price. If there are a lot of things that need to changed or upgraded, your purchase price should reflect that.
Concerning the budget, a common mistake that new owners often make is that they do not create a budget of their own. They copy-cat the previous owners budget. This may not be the best way to do things particularly if a certain expense seems high. Do your research and do what makes financial sense for you.
Do an analysis of financial records. Review the last 3-5 years of past financial documents for the business you are considering buying. This is common practice these days. You may delve farther into the past but it may be less reflective of what is happening in the present economy. Let your accountant review these documents as well. Check to see if the financials are accurate, detailed and up to date. If not, this may be a sign of financial distress the owner may be trying to conceal.
Don't act too soon. What is shown on paper may differ in reality. Also, you need to decide if particular business is the right fit for yourself. You need to determine what kind of role you desire to have in the business. Will you be an absentee owner or a hands-on owner? There are certain types of businesses that allow for absentee owners and there are certain types that require a hand-on owner. Does the business coincide with your personal goals? It is important to align your objectives with the appropriate type of business.
Don't assume things remain the same. During my time in this industry, I've seen a lot of businesses change ownership. A common mistake new owner's make is that they assume everything will remain the same when the business transfers ownership. People are not always so receptive to change. Expect some turnover. Key employees may quit. Also, you may need to build relationships with current or new vendors.
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