Are you ready to enter the business world but nervous about starting from scratch? You may be considering buying an existing business, which certainly has its perks when compared to establishing your own, brand-new operation. But there’s still plenty to keep in mind, and success isn’t guaranteed by simply writing a check and getting the keys. Here are a few tips to help you do your due diligence as you explore buying a business.
Considering the pros and cons
There are many favorable aspects to buying an existing business such as an existing customer base, a team of employees and drastic reduction in startup costs. You may be able to jump start your cash flow immediately because of existing inventory and receivables.
But there are also some downsides to buying an existing business. Purchasing cost may be much higher than the cost of starting a new business exactly because the initial business concept, customer base, brand and other fundamental work has already been done. Also, be aware of hidden problems associated with the business (like debts the business is owed that you may not be able to collect).
Choosing a business
There are many different types of businesses to buy. To narrow down the list of potential businesses you might be considering, ask yourself:
- What are my interests? If you have absolutely no idea what business you want to invest in, first eliminate businesses that are of no interest to you.
- What are my talents? Being honest about your skills and experience can help you eliminate unrealistic business ventures.
- What are my conditions for a business? Consider if a business has a condition that is unfavorable to you, such as location and time commitment.
Doing your research
Once you have found a business that you would like to buy, it is important to conduct a thorough, objective investigation and to determine a fair and equitable price for the sale of the business. You’ll want to examine information such as tax returns, financial statements, employee files, contracts, leases and any other important documents related to the business.
TIP: You should enlist a qualified attorney to help review the legal and organizational documents of the business you are planning to purchase. Also, an accountant can help with a thorough evaluation of the financial condition of the business.
Buying a business
When you’ve decided to move forward with buying a business, the sales agreement is the key document you’ll need to finalize the purchase. This agreement defines everything that you intend to purchase including business assets, customer lists, intellectual property and goodwill. If you do not have a lawyer to help you draft the terms of the sale, you should at least have one review the agreement before you sign it.
Closing on a business
The closing is the final step in the process of buying a business. Once again, you should have legal counsel available to review all documentation necessary for the business transfer. This page details items you should address during your closing.
If you think buying an exiting business could be the right path for you, there’s a lot of information available to help you succeed, including this article from Entrepreneur.com and additional guidance from NOLO.com.