Buying an existing business might seem like a better investment than starting a new one from scratch. There will already be foundations in place you can build on, and your work will focus on expansion and growth.
However, it can also be quite a risky move. How can you make sure the risks are minimal and that the business you purchase is a sound one? Here’s what you need to know.
Determine Why You Want to Buy the Business
As Simon Sinek would say, start with why.
Why do you want to buy a business in the first place? Do you want to earn a lot of money? Do you want to become a proficient CEO? Do you want to resell it in a couple of years for a certain profit?
Your motivation will help you choose the kind and size of business to shop for.
You should also consider the following:
- What industry should the business operate in? What kind of experience do you have in that industry, and what makes you think you will be able to run it well?
- How can you benefit from this purchase? Does the business have a loyal customer base? Do they have a patent? Are they operating with significant profits? What’s their marketing and sales network like?
- Can you run this business, and what will you need to do so? Will you need to hire new people and invest in production? Or will you need to lay people off and size down?
- Finally, ask why the business is for sale. This is a conversation you will need to have with the current owner(s). Don’t blindly trust what they tell you. Try to figure out whether there is a sinister reason they’re trying to unload the business or whether they’re just moving on to other ventures.
Assess the Value of the Business
Once you are quite clear on the reasons behind your decision to purchase a business, you need to determine its value.
If you are a financial expert, you can do this on your own. You will need access to a lot of the financial statements from the business itself, and you will also need to look at the brand’s reviews, online presence, competitors, and so on.
You can also hire someone to do the valuation for you, in which case you will have to spend some money upfront before you even decide whether or not you want to buy that particular business.
Note that just because a business is not currently profitable doesn’t mean that you can’t turn things around. With better management or marketing, you could quickly start to earn a significant profit. Consider how much risk you’re willing to take and how much effort you’re willing to invest in the growth of a business.
Assess the Health of the Industry
On top of examining the health of the business itself, you should also take a look at the health of the entire industry or sector.
You don’t want to invest in a niche that is about to go under or that is likely to experience financial or operational difficulties in the near future. This will only make your job harder, and if this is your first business, you want to make the ride as smooth as possible.
A good way to gauge the health of an industry is to check out the stock market. Let’s say you want to buy a manufacturing business. Take a look at the stock performance of stocks in the manufacturing sector. Examine both large and small companies and see how their shares are trending.
If you notice a sudden dip or rise, try to uncover its cause. It may be innocent enough (for example, a major broker may have spoken on the news about the best shares to buy), but it may also be a predictor of future trouble.
Choose the Ideal Financing Option
Once you’ve found the business you would like to buy, the question of whether or not you can afford it will naturally arise.
There are numerous ways you can finance your venture. Of course, you can put up your own money if you have enough laid by to complete the deal. You can also look for co-investors who will put up their own funds and help you run and manage the business.
You can look into getting a loan, too, especially if you need a significant financial boost to make the purchase happen. Different banks will have different interest and payment rates, so you should shop around and see who can offer the best deal.
Finally, you can also look at investors who only want to see a monetary return and would let you make all the decisions yourself. Finding good search fund investors can be a great option, as you can quickly get access to even large sums of money, helping you bridge the gap.
Close the Deal
Once you’ve found the business you want to buy, determined its value, and agreed on a fair price, you will need to handle the following steps:
- Craft and sign a bill of sale. This is the document that will prove the sale of the business, transferring ownership of all of its assets to you.
- Sign a new lease if you are also taking over business premises. The landlord should be able to negotiate new terms if they want to, and you need to make sure that the new terms suit the way you will manage the business.
- If the business has any vehicles registered, you will also need to take ownership of them. Make sure all relevant forms are signed at the time of sale.
- If the business has any patents, or more likely, trademarks and copyrights, you will need to sign several forms to transfer them to you.
- You should also ask the former owner to sign a non-compete. This is standard practice, and it can save you a lot of trouble down the line. A non-compete means that the previous owner won’t be able to start a competing business right across the street from you, so to speak.
- In case the former owner is staying on as an employee, make sure you sign all the proper contracts and agreements with them at the time of sale.
- Check to see how you need to handle any employment contracts with all the other employees, too, or if they will remain in force as they stand.
Now that you know how to determine whether a business is a sound investment or not, you can start looking at businesses for sale. Remember to carefully vet all information, double-check figures, and think each step through. It’s a major decision you’re making, so take as much time as you need to ensure you’re making the right one.
Featured image provided by Andrea Piacquadio; Pexels; Thanks!