For many small business owners, the path to business ownership included coming up with an idea and building the business from the ground up. While this is the dream from many, it might not be the best path to owning a business for others.
As an alternative to starting a business, some people might choose to buy one that already exists. There are several advantages to buying an existing small business, but it also comes with some risk. If you are thinking about buying an existing business, there are several points you will need to consider first.
1. Research the History
You need to know the complete history of the business. How long has it been in operation? Has it had other locations? If so, why did it move? Did it have a different business model at one point? How many employees does the business have? Has it ever been the subject of a lawsuit? If so, how was the lawsuit resolved?
2. Check the Finances
Beyond the general business history, you are obviously going to need to gain a deep understanding of the financials. Review the company’s tax returns, read the balance sheets and check out payroll records. You will also need to see any existing contracts the business may have and learn about any obligations they may have with customers or vendors.
3. Find any Missing Pieces
With everything you know about the business history and the records, you might find that things just don’t add up. That doesn’t mean that there is anything illegal or unethical going on, but it does mean that you will need to look a little deeper.
Maybe there was a change to the market or it could be something in the personal life of the current owner. Whatever it may be, you need to take the time to figure things out and see whether the facts change your outlook on the company.
4. Study the Customer Base
You need to learn as much as you can about the customer base. Who are the biggest and most loyal customers? Do they account for a significant amount of revenue? Would the business be able to survive losing one of these customers?
Along with studying the existing customer base, you will want to learn about the customer pipeline. How do they attract new customers? What type of effort are they putting into marketing?
5. Evaluate Assets
As a potential new owner, you are going to want to see what assets the company has and assess the value of those assets. What kinds of tools and equipment does the business have? Is everything in good condition or will you need to replace or repair expensive items?
6. Reason for Selling
Ask the current owner why they want to sell and consider whether the story makes sense. Maybe the owner is getting ready to retire or maybe running the business does not fit their lifestyle anymore. Whatever the story is, you need to think about it and make sure it makes sense. If the story doesn’t fit, that could be a big red flag for buying the business.
7. Reason for Buying
Have you thought about why you want to buy the business? Are you ready to be your own boss? Are you buying the business because you really want to own it or is there something else that seems to be steering you in that direction? Try to articulate your reasons for buying the business and make sure it is something you really want.
8. Is it a Good Fit?
Some businesses require special skills. If you have the skills that the business demands, then it might be a good fit. If not, you need to think about whether these are skills you could acquire. You don’t want to buy a business only to find that you are in over your head and that you do not have an understanding of the core skills that go into running the company.
9. Set Goals
Think about the goals you have in relation to owning the company. Are you trying to make a living for you and your family? Do you want to serve your local community? Are you looking to grow the brand and expand into different regions? Know what you want to achieve and have a plan to succeed.
In most cases, you are going to need to obtain funding to buy the business. How much is it going to cost to purchase the company? Is there enough revenue to fund current operations while paying your salary? Finding the right funding option can make a significant difference when it comes to your chances of success with the business you are about to buy.
Rae Steinbach is a graduate of Tufts University with a combined International Relations and Chinese degree. After spending time living and working abroad in China, she returned to NYC to pursue her career and continue curating quality content. Rae is passionate about travel, food, and writing for Funding Circle.