So you’ve decided to buy an existing business?

This giant step can bring both benefits and burdens to you as a business owner, and this article covers some of the pros and cons of buying an existing business.

Why is the business for sale?

This is perhaps one of the most important questions to initially ask – “Why are you selling the business?”

The answer to this question may save you days to months of research and planning, or could inspire you to continue with your plans to purchase the business.

What are the good things about buying an existing business?

1. The building, its fixtures, equipment and utilities are in place and ready to go.
2. The product or service is already an established local business, so people know who and what the business is and where to find it.
3. The current location is good for the business type.
4. Stock is on-hand and ready to sell.
5. A market for the product or service is already established.
6. Existing goodwill.
7. Existing staff.
8. A relationship with the local bank and businesses is already established.
9. Suppliers are already sourced for you.
10. The business is operational, and may have a good potential for growth.

What are the bad things about buying an existing business?

1. The existing building and equipment may not be suitable for the business, and repair and change could be costly.
2. The product or service may have a bad reputation in the local area.
3. The location is unsuitable for the product and service, preventing future growth.
4. Inventory may be out-dated, with old, un-sellable stock sitting around.
5. Bad debtors could be a liability for the business.
6. Unknown factors such as lease expiry, zoning changes and labor concerns.
7. Potential negative reaction by existing staff to ownership change.
8. Poor relationship with local bank and other businesses.
9. Poor relationship with current suppliers.
10. Zero growth potential.

Do your homework

When buying a business, don’t take the comments and information provided by the seller at face value. The seller has one thing in mind – to sell the business and for the highest amount possible.

Do your homework and research the existing business.

• Ask neighboring businesses about the business you intend to buy
  • Ask about local the business environment, and if they have any concerns as a local business owner.
• Check with the local chamber of commerce. They may have valuable information about the local market and environmental changes that might affect the business such as the opening of a large shopping center or retail mall.
• Visit the local council and confirm the zoning area for the businesses location. Ask if any changes are planned that might affect your business over the coming years.
• Look in the local phone directory and see if the business is listed.
• Where possible, try to talk to some existing customers and ask about their experience with the business.
• Meet with the businesses accountant and confirm if any liabilities or financial issues relating to the business exist.
• Meet with the businesses lawyer and confirm if any legal issues relating to the business exist.
• Meet with the current business owner at the business location, and observe how busy and functional the business is.

Additional tips and items to check when buying a business

• Ask yourself if YOU and your FAMILY are ready to take on this new challenge.
• Are you comfortable with the industry and the products or service the business sells?
• What is the future of the products or services currently available? Is the product increasing in popularity, or about to join the “remember those days” hall of fame?
• Is the success of the business strongly attributed to a single person, such as a salesperson, and if so can you keep them?
• Do staff salaries need to be adjusted soon?
• Can you buy from existing suppliers?
• What is the businesses credit rating with the suppliers?
• Has your lawyer checked the lease and sale agreement?
• Has your accountant checked the businesses financials? Is it profitable?
• Are the businesses records kept well?
• Have all sales been accurately recorded? Are all products selling and can this be easily ascertained?
• Confirm that the sales figures provided are for the portion or whole business segment you are purchasing, and not part of a larger business group beyond what is for sale.
• Are there seasonal sales cycles? What are the monthly and annual sales patterns?
• Have any recent marketing initiatives spiked sales beyond their usual level?
• What equipment is owned or leased?
• Will the seller agree not to start a competing business?
• Have you had the business independently valued?
• Take your time, and review all the information you are provided.
• Buy the business based on the return on investment, not price.
• Leave yourself enough cash to operate the business (cash flow).
• Last, but not least - Due diligence! As noted by Wikipedia.com “due diligence may refer to the process of research and analysis that takes place in advance of an investment.” http://en.wikipedia.org/wiki/Due_diligence