Have you been considering buying a business recently? Perhaps someone you know is selling theirs and you would like to try your hand at running it? There are several important considerations before you jump on the opportunity. Think them through and make an informed decision before proceeding.
First, what is your experience and background in running a small business and in this particular industry? If you have never owned a business before it is very helpful to look for one in your particular field of expertise. And, generally, a bank would never consider loaning you money for a business in which you have no experience.
Next, look at the business itself. Why is it for sale? If it is as great as the seller claims it to be, why sell? Why not hire a manager, keep it in the family, or even lease it out? The reasons are rarely simple. The sale requires more research than just the seller’s explanation. There will be both personal and professional reasons. You job is to understand and to make your risk decisions accordingly.
What are you actually buying? How does the price tag spread across the assets of the business? What is the condition of the equipment? What is the true replacement value of the furniture, fixtures and equipment? What would you need to pay for similar assets on the used market? What assets are not staying with the business? Are any of these departing assets critical to success of the business?
Make certain that you are not (unintentionally) buying the business debt. At times the owner will sell accounts receivables along with the accounts payables. How old are these receivables? Are any actual bad debts that you can never collect? How old are the accounts payables? Has the business not paid their suppliers and therefore are on cash on delivery? Check the amounts and ages of the accounts receivables and payables — even it you are not “buying” them.
Look at the financial statements and summaries for trends in income. Does this business have the ability to keep its current market share and remain competitive? What will keep the customer-base coming back? Can they be easily lured away by your competitors? How many existing customers will the business actually lose with a change in ownership?
How much additional money must be invested in the business in order to make the changes you think are necessary?
This business may be running profitably now and yet still not be able to sustain the debt load (bank loan) if you have to borrow money to purchase and run the business.
The last three to five years of financial statements and tax returns (ask to see both!) can be an indicator of whether the business has been well run.
If you are told that the financial statements don’t really reflect the true value of the business — that, in fact, much of the profit is “hidden” — walk away.
