Important Considerations When Purchasing a Business
Many people want to be in business for themselves, and one of the fastest ways to accomplish this is by purchasing an existing business. There are several potential advantages to going this route. Among the most important is that you are able to bypass the grueling startup phase and move into an established business right away.
When purchasing a business, the hope is that the new owner can move straight into profitability and earn enough to support their desired standard of living. But this is far from guaranteed.
Although you may have a significantly better chance of succeeding when you buy into an existing business, it does not always work out this way. This is why it is important to do some homework ahead of time to make sure that the business you are considering is a good fit for you.
Here are seven critical factors to consider when purchasing a business:
What is the owner’s reason for selling the business?
It is important to get the owner’s take on why they are selling the business that you are thinking about purchasing. Is it for health reasons? Are they retiring? Are they moving on to a different venture?
There are a lot of valid reasons why a business owner would want to sell, but sometimes, they might be trying to get out because things are going in the wrong direction. Examine carefully what reasons the owner is giving you and look for any potential red flags. If you find a reason to believe that they are selling in order to cut their losses, then it might be a good idea to look at other available businesses in the marketplace.
Is the business worth the price that the current owner is asking?
You will want to ensure that purchasing this particular business makes financial sense and that you are paying a reasonable price. There is usually some room for negotiation within the asking price, but the starting price needs to be close enough to what you should be paying that it is worth going any further.
On a related note, it is important that you have the financial wherewithal to finance the deal without getting in over your head. Ideally, you have a decent amount of available capital to put into the venture, so you will not have to finance the whole thing.
Do you have the necessary skill set to effectively operate the business?
Just because a business is profitable under the management of its current owner does not mean it will remain that way when a new owner takes over. For this reason, you need to honestly assess your own skills to ensure that you are qualified to run this business.
What is the future outlook for the business and the industry that it is in?
Timing is one of the most critical factors that should be looked at when considering a business for sale. Is it a good time to get into this particular business and the industry it is in? The answer to this question will be determined largely by whether the business is on an upward or downward trajectory and how the industry and the overall economy are doing.
Does the business have a good reputation with its customers and the community?
If you are looking at purchasing an existing business, it is very important that the business has a good reputation in the community where it operates. Look carefully at customer reviews. After reading several reviews, you should be able to identify some common themes within the feedback about what customers think of the business.
Are there any recurring complaints about the business that would cause concerns? Do they have any complaints filed with the Better Business Bureau or any similar organizations? Do they have a loyal customer base that you can build on? Try to find a business that has a substantial amount of goodwill established within the community.
Who are their current and past employees, and what are their compensation plans?
This can help you understand the company culture and identify any potential human resource problems.
Does the business have any potential legal liabilities?
Before making a large investment like this, you will need to perform your full due diligence. One of the things that you will want to find out is whether or not the business has any legal liabilities. Is the business facing any pending lawsuits? Are there any liens or judgments against the business or any of its owners? You will need to know the answers to questions like these before you move forward.
Are there any issues with the financials?
Another part of your due diligence is digging into the financial records. First of all, the records should be organized in a way that makes it fairly straightforward for you and your accountant to review everything. If that is not the case, this could be a red flag right from the start. If, after a thorough review, everything is in order, then you can move forward to the next steps of the transaction.
Why is the owner selling? This information can help you determine the motivation behind the sale of this company including any liabilities, and will help you identify the potential for growth or improvement in the business.
Work with an Experienced Southern Alabama Business Law Attorney
Purchasing an existing business can be a great investment if the circumstances are right, but it is important to do your homework ahead of time. Equally important is that you have a strong team of professionals behind you to help ensure a smooth and successful transaction. One of the critical members of this team is your business attorney.
If you are considering purchasing a business in southern Alabama, contact Stone Crosby, P.C. for business law assistance. Get started with us today by calling our Daphne, AL office at (251) 626-6696 or sending us an online message. We look forward to serving you!