By Megan Totka
It’s often easier (and less expensive) to purchase an established business than to start your own from scratch. There are, however, potential dangers involved in this process. If you’re thinking about buying an existing small business, or simply acquiring its assets for your own company, you should always consider the risks of such an investment.
Below are three of the main risks involved when purchasing an established small business:
Unpaid Sales Taxes
In most instances, a buyer will only inherit the assets of a business, while the debts remain with the original owners. Sales tax, on the other hand, transfers to the buyer once the purchase is complete. If the seller wasn’t completely caught up on their state and local taxes, you may find yourself slammed with an unexpected bill from the state tax authority. Before making the purchase, you should get a clearance certificate from the state tax authority to ensure that the original owners have filed all of the necessary returns.
Once a business owner pays all of the necessary expenses, they’re left with their ODI, or Owner’s Discretionary Income. You can verify the accuracy of the seller’s ODI to determine the health of the business. If it’s been steadily declining over the past several years, this may be the reason the owner has decided to sell (and it may spell disaster for you in the future). You should also evaluate whether or not the current ODI is enough for you to live on. If it’s not, it may not be worth the investment.
Poor Business Reputation
In business, reputation is everything. If a company has a bad reputation, it can be difficult for a new owner to pull it out of a nosedive. Check the BBB or the police station to see if there have been any serious complaints leveraged against the company, or browse review sites like Yelp and Angie’s List to determine how the general public feels about the business. It can be hard to rehabilitate a bad reputation, particularly if you’re new to business ownership.
Investigate Other Risks
In addition to these three risk factors, it’s important that you look into reasons the business owner may want to sell. There may be heavy competition or generally poor performance. In most instances, the seller may choose to conceal potential problems with the company in order to facilitate a quick sell. Do your research to ensure that it’s a solid investment and that the business has the potential for success.
There is a lot involved with the purchase of an established business. You acquire a ready-made infrastructure, complete with all of the necessary equipment and a customer base. But you also inherit employees who may not align with your business plans. Consider every aspect of the company before you commit to purchasing it. By evaluating every possible risk, you increase the likelihood that your future with this company is successful and lucrative.
Megan Totka is the chief editor for ChamberofCommerce.com which helps small businesses grow their business on the web and facilitates connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide. She specializes on the topic of small business tips and resources and business news. Contact Megan at email@example.com and follow her at @MeganTotka.