Buying an existing business is a very different venture than starting your own business. And it’s important to carefully consider all the pros and cons and know what to ask, both yourself as well as the business owner, exactly the right questions before finalizing a purchase.
Just like starting a new business from scratch, failure to take the right preliminary steps can result in a poorly run operation and even store closure. So take a look at these questions to get started on the right foot.
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What Are the Pros and Cons of Buying an Existing Business?
Before we jump into the specific questions to ask when thinking about buying a business, let’s cover some of the basic pros and cons of doing so. A lot of entrepreneurs are torn between starting their own and buying a business, so hopefully this section clears some things up.
The Pros of Buying a Small Business
It’s already a proven business model – This is probably the most compelling. Buying a business that has been successful for years means that the model and customer base are established, making future success more likely.
It’s easier to start – Again, a proven business model means that you can take a whole lot out of the initial equation: business plan, market research, marketing, location planning, etc. Sometimes having fewer options makes everything a whole lot easier.
Branding is established – Establishing a brand is one of the most challenging, time-consuming, and expensive aspects of running a business. It takes creativity, ingenuity, and often years to get a brand off the ground. Buying an existing business means that you don’t have to worry about that.
Financing is easier to come by – Banks and other lenders are more likely to offer loans to businesses that have a proven track record. Securing loans for further locations or store improvements will be much more feasible if you’re buying an existing business.
You have an immediate customer base – Even though some shoppers may leave after the business is transferred to a new owner, the vast majority are likely to stay (so long as nothing major is changed). Securing a solid customer base off the bat takes a lot of the unknowns out of the equation.
The Cons of Buying a Small Business
It can be expensive – Buying a successful and proven business will come with a high price tag. All the pros mentioned above will make your success more likely. You get what you pay for, and in that case, you’ll be paying a lot.
You might have to make some big changes – Even if you’re buying a successful business, there may be changes that you want to make. These might be expensive, met with hostility by existing employees, or be difficult to implement.
The business could be a total sham – With proper research and due diligence it’s unlikely that you’ll be conned, but there is still a chance that the business might not be as successful as advertised.
You lose the ability to be creative – Much like buying a franchise, buying an existing business takes some of the fun out of making it your own and adding character.
Questions to Ask Yourself
Ok, now let’s turn to the questions that entrepreneurs should be asking to get this process started. And before even talking to the business owner, you should be turning to yourself to make sure you’re making the right decision.
Do I want to buy this business or start my own business?
This is the most important. You need to consider the pros and cons list above and figure out which option is better for you.
Why this business specifically?
If you’ve narrowed down your list and have a few businesses in mind that you’re thinking about buying, ask yourself exactly why you want to buy this business. Don’t let yourself get trigger happy and buy just any business that comes your way. Make sure it’s one you’re passionate about.
Which friends and colleagues can give me advice on this?
This is another important one. You can lean on your years of experience all you want but it’s always helpful to get advice from the people around you. Ask friends and family for their input.
Questions to Ask the Owner
Once you feel confident about your motives, and know exactly what you’re looking for, and found a viable option, it’s time to ask the existing business owner some questions.
Why did you decide to sell your business?
While some of you look for businesses that need some fixing up, many are looking to buy an established, successful business. So it’s with that in mind that you should ask them why they’re selling. They’ve built the company, made it successful, and return a great profit. So what gives? This might help you identify some red flags early on in the process.
How long has the business been around?
Of course, you’ll want to know how long the business has been around and a bit about its history. Talk to the current owner about how it was started, their role in managing the business, and some of the hurdles that they’ve had to overcome. Of course, it’s great to buy a business that has been well-established and proven, but this will come with a higher price tag.
How much work is it all?
While any aspiring business owner likely knows it will take a whole lot of hard work and perseverance to be successful, it’s still important to have at least a little bit of work/life balance. Figure out more details of exactly what your role as the owner would look like. This will also allow you to better plan hiring and scheduling down the road.
How much do you make?
Even as the business owner you’ll still need to pay yourself a salary. It’s important to have this expectation established from the get go to know if it’s feasible for your current personal financial needs.
Questions to Ask Regarding the Finances
While talking money is rarely fun, it’s, of course, vital to do so in the course of buying a business. You’ll need to get a bit more into the details to determine how efficient the operation really is.
What is the overall revenue and profit margin of the business?
This is the one to start with. A business owner who is trying to sell the business for a fair price will have no problem letting you look under the hood and see just how profitable the operation is.
How has accounting been handled?
You want to be sure that all accounting has been handled accurately and legally over the years. Make sure that all tax returns, cash flow, balance sheets, payroll, write-offs, etc. add up and don’t seem fishy. You don’t want to buy a business that is secretly cooking the books.
Would you be ok with a third-party audit?
If you’re unsure of how the financial end of things appear, don’t be afraid to suggest an audit from someone not involved on either side. If the owner doesn’t agree to this, it’s a certain red flag. An external audit is the surest way to get an accurate valuation of the business.
Are any liabilities or assets tied to the business?
You want to know about all debts and assets that may come with the deal. On the debt end of things, this could include mortgage rates, leased equipment, ordering contracts, and others. Assets might include owned equipment, existing inventory, brick and mortar locations that are paid for as well as some intangible things, like brand recognition.
Questions About Legal Issues
You’ll also want to cover a few legal bases to make sure that you’re not blindsided by anything as soon as the keys are turned over to you.
What permits are necessary for running the business?
The majority of businesses require permits. Some require a substantial number of them. Make sure you’re up to speed on exactly what you’ll need and how to apply for them. The existing owner should be able to walk you through everything.
Are there key employees?
Purchasing a larger business will likely mean that you’re keeping on at least a portion of the existing staff. It’s important to know who’s who and what employees you can lean on in a leadership role.
What kind of financing will be available?
It’s likely that you’ll need to finance the purchase of a small business, even a single location operation. Discuss this with the seller and learn what financing options are available. Most owners want to have the sale completed within a few years, but this will vary by seller.
More Questions to Ask Before Buying a Business?
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