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ND - Buying an Existing Business - Let the Buyer Beware

By: Michael Gallagher, Deputy District Director
North Dakota District Office

You can start into your own business in one of two ways.  You either start from scratch or buy an existing business.  Buying an existing business can be an excellent way to get started as your own boss, but brings with it both risk and opportunity.  When you buy an existing business you generally have some information that should be available as a starting point, but spend time investigating the opportunity before you make a commitment.

Ask the owner a series of questions: Why do you want to sell?  What is the purchase price?  What am I purchasing for that price?  Who are your current suppliers?  If they have employees, ask about their status and potential for staying with the business.  What are the employees being paid?  Are there any benefits offered to employees?

You should obtain tax returns or other reputable financial records to evaluate the profitability and cash flow of the business.  If you’re not familiar with interpreting financial statements, seek guidance from counselors at SBA, the Small Business Development Center or SCORE. 

You can often get current information on land and building values and taxes through the County Auditor’s office.  You may be able to obtain usage and billing information from local utility companies and current insurance coverage and cost from an insurance agent.

Find out what kinds of terms the company has with its suppliers and what the terms are with charging and payment from customers.  Are the business assets adequate – you don’t want to start out with obsolete equipment or inventory compared to your competition.  If you’re purchasing real estate you should have somebody knowledgeable inspect the building.  Will it need a new roof?  Are electrical or plumping upgrades needed?  Find out what kind of legal agreements the company has, such as building leases, franchise agreements, customer contracts, etc.  In many cases the lease terms may not transfer to a new owner and you may have to negotiate new terms which may result in higher rent.  There may be conditions you do or don’t want to continue.  Get a list of what is being purchased and the value.  This will help you to determine if there is any “goodwill” or “blue sky” being purchased.  “Goodwill” and “blue sky” are the terms usually used to refer to the amount you are expecting to pay beyond the value of the business assets.  Most banks are not willing to loan you money to pay for “goodwill”.  

Take the information you receive and use it to help you evaluate the company.  Again, you may need some help in this process.  Use this financial information and put your ideas into a written business plan.  Be specific on how you will manage the business.  If you think you could manage it to greater profitability, be specific in your business plan as to why and how. 

Trying to develop a successful company turnaround can tax your energy and resources.  It certainly does not make much sense to pay a premium price for somebody else’s problems or mismanagement.  You may be better off not buying someone else’s problems.

If you a purchasing a successful business can you maintain the operation at its current level of sales?  How important was the previous owner and perhaps even involved family members to the business.  Are you sure you can retain the personal goodwill established over years and perhaps even generations of effort?

Will this be the kind of lifestyle you want for yourself?  How about your family members?  Are they on board with this?  Ask professionals for their opinions, such as your banker, accountant, attorney, and SBA resource partners.  Just like starting a business, buying a business involves a learning process which could result in costly mistakes.  A little time and effort can reduce the risk and yield significant dividends in the long term.

Mike Gallagher has been a Business Development Specialist for the U.S. Small Business Administration since 1984, and the Deputy District Director since 2005. A graduate of the University of North Dakota, Mike is a Certified Public Accountant and a former business owner and educator. He can be reached at michael.gallagher@sba.gov.