Starting a business can be risky at best, and more often than not there is already another business in place that would serve as a competitor. Buying an established business can often be less risky, easier to finance, and turn a profit faster — provided you take the right steps.
Here are six steps you should take before you agree to purchase an established business.
1. Check for Hidden Motives
You can’t assume that the seller is going to be completely candid with you about the business for sale including faults the company might have. Maybe the business seller really does want to retire and go fishing in Baja, but it’s also possible that a corporate competitor has set up shop, his customer base has dwindled, and he’s trying to sell the business before it gets worse. Be sure to ask around about the business for sale by the owner and gather unbiased opinions of it.
2. Check the Spec List, Twice
Generally, when a business is up for sell, the seller will prepare a spec sheet with everything that is included in the sale. When you buy an existing small business, make sure that you’re getting what you want in the deal. If you want a turnkey business, make sure that the entirety of the business is included in the asking price.
A turnkey business should already have a proven, successful business model and simply require investment capital and labor. You don’t want to get stuck with an empty building, or with a delivery company that has no vehicles.
3. Determine the Fair Market Value Price
When you buy a business, be prepared to assess the seller’s asking price. The business for sale may not always be valued at a fair representation of what the company is actually worth. Ask the seller how the business asking price was determined, then ask to review financial records to determine the anticipated annual profit of the business for sale. It is also wise to consult an accountant.
4. Find the Financing to Buy an Established Business
If the business for sale indicates pricing that falls into your budget then it’s time to start reviewing financing options. Generally, it is easier to finance the purchase of an existing business than it is to finance a new startup.
If you’ve done your due diligence before you buy a business, you should be able to justify that the business is a worthwhile investment. Friends, family, banks, credit loans, and personal finances are all good options to explore when it’s time to sign on the dotted line.