Buying a business is a great option for your first entrepreneurial leap. Instead of building something from scratch, you can get a head start with an already established name and client base. In saying that, buying an existing business, whether it’s a cafe or an accounting firm, isn’t without risk. So, before you commit and part with your cash, do your due diligence and ask these five questions first.
1. Why are you selling?
If you’re buying an existing business, the first question you need to the seller is why they’re selling it. Their motivation for selling could be straightforward, for example, they may want to reduce their responsibilities, start a new project, or retire. In most cases, this information is offered legitimately, however, there is a risk that they’re not disclosing everything.
Perhaps they know that a competitor is planning to open up nearby, or they have glossed over the weak areas of the business. It’s your job to ask questions and do your own research. If you do uncover something, you can use it to negotiate on price.
2. Is the business viable?
A solid financial track record and steady cash flow are two boxes you need ticked before you commit. So, get your hands on the books and call in a professional to help look through them. Look at everything – balance sheet, profit and loss statement, tax return, inventory, sales, and bank statements. Are they well kept and accurate? Are sales as good as the seller has made them out to be? How do their financial projections compare with historical trends? Are forecasts achievable? Ask all these questions and more.
3. What exactly am I buying?
When you’re buying an existing business, you need to be very clear on what you’re actually getting. For example, are you buying stock shares (the company as a legal entity), or are you buying assets (everything owned by the company)? Also, does the price include accounts receivable (unpaid invoices)?
If assets are part of the sale, what assets are included in the agreed price? This includes tangible assets such as equipment, vehicles, and stock, as well as intangible assets such as copyright, trademarks, and company knowledge. Regardless, make sure there isn’t any debt still owed or, if there is, you understand the payment arrangement. In addition, make sure you see a list of everything they intend to sell along with associated warranties, guarantees, and current valuations.
4. Is the product or service sustainable?
Even if the business has done well to date, will it continue to do well in the future? A large part of this will depend on you and how you run it, of course, but it also depends on the market and market demand.
Are prices rising or falling? How is competition in the market changing? Will demand for the product or service still exist in two, five, or 10 years? Could the business offering become obsolete? Is there potential to innovative or expand? Make sure you do your research and even speak to a few industry experts if possible.
5. What cash flow will I need?
As well as the money you need to buy the business, you’ll also need working capital when you get started to cover things like wages, new stock, rent, and utilities.