There’s a big difference between starting a business from scratch and buying one that’s up and running.
When you buy an existing business, you get a company with everything in place, an established reputation, immediate income, and reduced business risk.
Once you get serious about a business you want to buy, it’s up to you to make certain it’s in the shape the owner says it is, and the profit is what he claims. Remember, there are many businesses on the market that are being sold because they’re dying: negative cash flow, declining sales, worthless inventory, incompetent staff, poor location, and many other kinds of headaches that will be yours once the deal is done.
Maybe you believe you can fix the problems once it’s your company, but it’s critical that you know about them going in. No surprises. If there are problems, you should get concessions on the price.
Get answers to these questions, and insist that the owner verifies his answers.
1. How much does the business make? This is the most important question, because the more it makes, the higher the price you’re likely to be asked. How much can you take out as salary? What is the return on your cash investment? Get a smart accountant to go over the books of the last two or three years, and review the owner’s claims
2. Why is the owner selling? Often the owner wants to cash out and retire. Just make sure the sale isn’t an attempt to dump a crumbling company on you.
3. What’s the company’s reputation? An important part of what you’re buying is “good will.” Talk to customers and neighboring businesses. Get trade references from suppliers. Does the business pay its bills? Is it in imminent danger of losing important customers? (The owner will give you references to talk to, but you should also talk to people of your own choosing.)
4. What does the business own? Property? Inventory? Equipment? Contracts? Are they valuable, or are they nearly to the end of their useful lives? Get realistic valuations from your accountant and others who have the experience to make judgment calls.
5. Who are the competitors? Does the owner compete effectively with them, or are they overtaking her? How would you compete with them after you become the boss? Find out if the owner is selling because she can’t possibly compete, say, as an independent store facing one of the giant chains.
6. Are there changes up the road? Is the neighborhood deteriorating or improving (or at least stable)? Are there any plans or rumors of a competitor moving into the area? Is the landlord planning to increase the rent?
7. Does the property need to be improved? Are there water leakage problems? Is the plumbing in good shape? Is the electricity up to code? Get an experienced inspector to go over the property carefully.
8. What are the business’s true operating expenses? Check everything: rent (if renting), wages, utilities, insurance, taxes and everything else. Have your accountant check every figure.
9. Will the customers stick with you once you’re the owner, or will they drift away if they can no longer deal with the person they’re used to? Is the owner-customer relationship more important than the business itself? You may want to require the owner to stick around for a while after the sale, to ease the transition.
Be insistent and thorough before you put your money on the table. Don’t assume anything. Once the deal is done, the responsibilities of an owner are yours. You want to know that you got what you paid for, and that you have a good shot at being successful.