Know Before you Buy a Business

In these frustrating times for our small businesses throughout our communities, I have had discussions recently with several CEOs who are wanting to buy a business.  Some express that they have wanted their own business and now see an opportunity to start one by buying an existing business.  Others see this as an opportunity to buy a business that is already in operation rather than going through all the start-up tasks to start one from zero.  Still others want to expand their business and have found a related business (or even competitor) that would be a fit for their current operation.

My first response in the conversation is to comment that there is a lot you need to know about a business before you buy and usually share four key questions to ask the current owner before making any business purchase.

Purchasing a business can be a highly profitable way to jump into the world of entrepreneurship. When you buy a business, your start-up costs are non-existent, your team is already assembled, your business has existing customers and vendor relationships, and processes are already in place. In other words, you have a huge head start towards success.

Purchasing an existing business, however, does not guarantee success. First, you need to do your research to determine if the business is worth pursuing.  In other words, investing in a business requires the same approach you would take before making any investment. It should also provide the same outcome - a significant return over time.

A business can return high profits, but it is also a riskier way to invest your savings. To mitigate your risk, study the past performance and current condition of the business. You will also want to consult with professionals in the same industry and those who are familiar with the business to help evaluate its prospects for the future. Do your due diligence and learn as much as possible about the business so you can make an intelligent and informed decision.

Gather as much data on the business as you can before you decide to purchase. The best way to do this is to sit down with the current owner and ask these four critical questions.

Question 1: Why Is the Owner Selling the Business?

This is one of the most important questions and the one you should ask first when considering a purchase. Context is key to any sale. If the owner is retiring, going through a life change or selling for another purpose with complete transparency, this could be a good sign that the opportunity is worth exploring. If, however, the owner is looking to sell quickly or not providing a clear reason for the sale, proceed with caution.

Try to uncover as many details as you can about why the owner wants to sell. The fact is that most business owners don’t walk away from profitable businesses unless they have strong personal reasons to do so.

Question 2: What are the Financials?

Is the business in the red or the black? And why? Dig deep and get as much insight and context into cash flow, investments, payment terms, and liabilities as possible. The owner should be able to easily provide you with this documentation, show you the money flowing in and out of the business, and give you a strong sense of the financial health of the company.

Question 3: What is the Business’ Reputation?

Perception is reality. If other businesses or leaders in the company’s industry have a poor perception of the brand you’re considering purchasing, that should weigh heavily on your decision to buy.

Purchasing a business that requires immediate reputation management – whether from mismanagement or consumer mistrust in the product or service - may be a way to get a solid deal on the purchase. However, repairing a brand’s reputation requires capital and a long-term commitment to turning things around. If you’re buying a business that you plan to be deeply involved with for years, and you’re confident in your ability to positively impact the culture, a fixer-upper business could be a steal.

On the flip side, a well-respected business with an owner whose identity is deeply intertwined with the identity of the company means you will have big shoes to fill and your decisions as the new owner will be scrutinized. This is also something to seriously consider if you’re looking to make the company your own.

Question 4: Does the Purchase Include Everything You Need to Seamlessly Run the Business?

Make sure the purchase includes all of the essentials that you need to get up and running once the purchase is complete. This could include leases, contracts, customer lists, patents, trademarks, service marks, trade names, essential employees and any other element of what’s made the business operable and successful up to the time of the sale.

Buying a business is a big decision that is going to require your long-term dedication. You are not just investing in a company or a product; you’re investing in the customers and vendors you support and in the livelihoods of the people you employ. It is not a decision to make quickly or without insight from a small, core group of people you trust, like a SCORE mentor.

A SCORE mentor can help you evaluate the business you’re considering and work with you to gather the right information to make the best, most informed decision possible. If you do decide to go forward and buy, your SCORE mentor can guide you through the purchase process.

About the Author(s)

Dean Swanson

Dean is a Certified SCORE Mentor and former SCORE Chapter Chair, District Director, and Regional Vice President for the North West Region, and has developed and managed many businesses. The Rochester Post Bulletin publishes his weekly article on a topic geared toward the small business community. The articles here are printed in their entirety.

Certified SCORE Mentor for the Southeast Minnesota Chapter

Key Topics

What You Need to Know Before Buying a Business