Tips on Buying a Business

More than 700,000 businesses change ownership in the United States each year. But not without significant research and planning. The decision to become an entrepreneur is a big one. Deciding to do so by buying an already existing company can seem even more daunting.

Start by closely examining whether the prospective business is the right one for you. You will want to find a business that suits your skills, knowledge and interests, just as you would if you were starting the company “from scratch.”

Do not put agreements in your own name. You will want to establish a separate business entity for the transaction so you do not put your personal assets at risk in the business purchase.

Remember that even if a business shows a profit, that does not necessarily mean that it’s a successful enterprise. You need to have an understanding from the seller about which assets are owned, which assets is rented or borrowed and what is owed. Don’t be surprised by a pile of bills, overdue rent or other debt.

You’ll want to inquire until you feel assured you have an understanding of why the business is being sold. The current owner may say he’s retiring, or he may know that a competing major big-box retailer has just purchased property on the next corner. You want to understand what the business environment you’re buying into is going to be.

Investigate what kind of image the company has in the community. Ask neighboring businesses, customers, competitors and “the man on the street” what they know and what they think about the business you’re considering. Be cautious. If the firm has a good reputation, don’t take ownership and start making a series of dramatic changes. Capitalize on the company’s good name.

On the other hand, don’t assume that the company’s good name will carry it into the future without some kind of diligent and strategic promotion. You’ll want to work to keep current customers and attract new ones with a solid advertising and public information campaign.

Be a good negotiator in your purchase, or hire someone to be one for you. Buying a business is not unlike buying a home. Are there physical improvements that need to be made? What is the status of the intellectual property the company owns? Are there trademarks in place? What about stock and outstanding bills? What will you be responsible for, and what will the current owner cover?

It’s tempting, when a business is already functioning and established, to over-extend yourself in the purchase because you feel as though a great deal of the work of getting the business on its feet has been done. Be cautious of price. And if the price tag is too high, wait until you have more ready cash amassed, or build a buying team to help you with the commitment.

Keep in mind making drastic changes, particularly those that require retraining staff and adjusting processes, can take time and cost money. Rely on the current employees for their knowledge of the company, and gather their input before modifying the way the firm is run.

And, most important, insist on seeing financial statements and tax returns, and have an independent financial adviser provide you an analysis of the firm’s profitability and liquidity. In some cases, you may find that starting a new enterprise is more cost-effective than buying an existing one. Whatever you decide, you need to have all of the facts. If the current owner balks at providing the information, move on to the next possible deal.

In reality, there are many similarities between buying a business and starting your own. Ultimately, you must start out doing something you enjoy, the business should be well-capitalized, and you should have done your research on the industry and the viability of the business.

Being able to just turn the key and make sales is an appealing idea. Just be sure that what you find when you unlock the door is not the residue of someone else’s problems. v

Virginia Wilson is a counselor with the Missouri Small Business Development Centers at the MU University Center for Innovation and Entrepreneurship. Reach her at 573/882-7096 or [email protected]