What you need to know before buying a business

During these difficult times, there are many business-minded people who are wanting to buy a business. Some are seeing the current situation as an opportunity to buy a business that is already in operation rather than going through all the start-up issues to start from zero, and others want to expand their business through an acquisition that would add value to their current operation.

Buying a business could be a very smart strategy to jump into the world of entrepreneurship or to grow in an accelerated way. 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. More important, you are able to mitigate risks by performing a complete due diligence and make sure that your return of investment will make sense. You are able to study the past performance and current condition of the business, and learn as much as possible about the industry so you can make an intelligent and informed decision.

Here are a few things you must know before buying a business:

Understand why is the owner selling the business

Context is key to any sale, and you need to understand the real reason of the sale. Sometimes, the immediate answer to this question doesn’t give you the real reason, and it is your job to understand what is the seller trying to accomplish after the sale, not only why they think is the reason of selling. 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. The fact is that most business owners don’t walk away from a profitable business unless they have strong personal reasons to do so.

Analyze the business financials

Analyze deeply and get as much insight into income, cash flow, costs and liabilities. The owner should be able to easily provide you with this documentation and give you a strong sense of the financial health of the company, as well as sales track record. I recommend you to hire a CPA to help you interpret these numbers and identify any anomaly, a few hundreds could save you thousands of dollars in the future.

Evaluate the business’ reputation

We all want to buy a well-respected business and this is also something to seriously consider if you’re looking to grow the company in the short term. 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, then you could consider making a deal with a damaged reputation company under a lower price. However, it is always better to reduce chances of failure and acquire a business with a good reputation.

Scrutinize contracts, agreements and intellectual property

Make sure the purchase includes all of the elements that surround the business and that you are going to be able to own everything that relates to the business. This could include leases, contracts, customer lists, patents, trademarks, service marks, trade names, essential employees and any other element that makes the business operable and successful up to the time of the sale. I recommend you to hire a business attorney to help you interpret these documents, again, a few hundreds could save you thousands of dollars in the future.