What to Look for When Buying a Business
Buying A Business
As business opportunities are seemingly around every corner, many people have a difficult time finding the one that suits their lifestyle. The idea of owning your own business is an exciting prospect for many people chasing their own version of the American Dream. Sometimes the initial excitement of starting a new business is quickly crushed with all of the legwork it takes to exercise the proper due diligence when searching the commercial real estate listings. There simply are a lot of details and nuances in every aspect of researching and purchasing your new business. Having a professional business broker by your side can be very helpful in the overall process.
While operating through a business broker as an intermediary between you and the seller, there is still a lot you can do on your own to prepare to make the best decision about acquiring your new business. The commercial real estate field has an abundance of new and existing business opportunities for you to consider.
You should always learn as much as you possibly can about a potential investment, and purchasing a business is no different. You will always want to speak to the current owner of the businesses you have selected to review on your search and if possible, you might even want to speak to their staff. This is first hand information that will be highly valuable on your path towards your informed, final decision.
Of course, there are the extremely important questions you could ask in this situation such as:
What made you want to sell your business?
Perhaps the business is failing and you will want to find out before you begin the process of researching and potentially purchasing the company. You will hope the owner is honest with you here, but there are more ways to figure this out as we will explain later in detail.
Don't Hesitate. Ask More Questions!
With these key factors out of the way what else would you want to know about the business you could be potentially taking over? Many factors play into the purchase of a new company and you will want to know as much as you possibly can before you make this very important decision for yourself and your family.
A good place to start is asking as many open-ended questions as you can. Make the person you are asking feel comfortable and open to discuss anything with you. If you treat this part of the process like a friendly chat, the seller may be more likely to be open and honest with you. After all, they do know you’ve already expressed an interest in purchasing, so they will hopefully want you to feel informed so you can make the right decision. Ask the seller questions that allow them to open up about the nature of their company and even their day-to-day life. Some good open-ended questions could be:
Ask to see their balance sheet to determine cash flow.
A business is essentially real estate that pays. Marketing strategies, customer base and business assets will all play a part in the decision making process, but immediate cash flow will show you the most important factor in your potential new business. This question is necessary to help you determine the positive (or negative) cash flow of the business as it currently operates. Essentially, when you purchase a business you are purchasing profits. It is important to see how the owner was being compensated through the business as it currently operates and how you can generate income once you are the new owner. This information will likely guide the entire buying process and direct any negotiation of your final purchase.
Ask them to define their customer base.
This will help you determine the type of work you will have to put in to retain existing customers and perhaps shed light on ways you can grow new customers into your base. Sometimes a business does government contracting and there are legal documents and regulations that may change depending on the political climate. Some businesses rely on nearby college students and summertime would have lower sales. Some businesses sell to other businesses so corporate accounts would have to be factored in. Are you going to keep the existing customers if they hear about the new ownership? Each type of customer base has advantages and disadvantages so this will help you determine if the company is going to be something you feel you can work with.
Ask them what challenges they have encountered in the past and what recent challenges they have had.
This answer could be one of the most valuable pieces of information you could get out of the current business owner. This could help you identify the biggest weaknesses of the business. If you are particularly up to new challenges their answer could be the source of your biggest opportunities. In this case you would be looking out for what their major weaknesses are. If you feel you could overcome their weaknesses you could turn these challenges into a source of personal strength when growing your new business.
Ask them about their competition.
While evaluating the new business for sale, it is crucial to evaluate the market share, competition and potential threats the business may face. In your own due diligence, you may want to look at the advantages the business has over its competitors and whether it is direct or indirect competition. Spending time on this research will give you a clearer picture of what they have to offer to the marketplace, and give you ideas on where you can excel or possibly fail at your new venture.