Buying a business is a major life decision. Aspiring entrepreneurs often worry about how much to offer and what will be involved once the company becomes theirs. A mistake can cost tens or even hundreds of thousands of dollars.
Before purchasing a business, gather as much information you can about it. Use the internet to view the company’s website, Facebook page, Twitter, and Instagram. Find out if the business owner has been active on social media or if it’s a vehicle that can help grow the company even bigger. Visit the company and observe its operations. Nothing can top first-hand experience. If you are buying a franchise, learn as much as you can and the corporation online and visit the location on your own.
When assessing the condition of the target business, the most critical things to evaluate are:
- Financial Situation – Determine whether the owner retiring or looking to do something else or if he/she is looking to dump a struggling entity. Look at the books and determine if profits have risen over the past three years.
- Sales and Profits – Is the company generating revenues and do those revenues exceed the costs of the business? Have sales increased or declined during the past year?
- Reputation and Product/Service Quality – If you don’t already know this, investigate first-hand and have others give their assessment, as well. Do the company’s products/services distinct have a distinct advantage and differentiation from its competitors?
- Location – By now, everyone knows the old real estate adage. An important question to ask: Is this neighborhood on the rise or on the decline? Figure out how demographic trends or geographic might change the company’s prospects for success? Also, read the current lease and make sure is transferable.
- Facilities and Equipment – Are the building and its contents in good condition or are they in need of upgrading? Replacing aging equipment or an air conditioning system can be a major investment.
- Customer Base – Determine if the business succeeds primarily because of the personality and the relationships with the public that the current owner has fostered. Figure out whether your skill set or those of your partners and staff will be adequate to make the company thrive.
- Staffing – Will employees retire or leave once the company changes hands? This may be tricky to determine because if you meet the staff, they may be trying to answer your questions with the “right answers” rather than their true feelings.
Once you have completed your research, it becomes time to negotiate the purchase price. Ask how the owner arrived at the selling price and whether the valuation based solely on the seller’s own assessment. If so, you may want to get an appraisal conducted by a third party.
After the final sale price has been reached, you must now determine whether you are able to self-fund the venture or secure financing to buy a business. The exercise will be all for naught if you cannot secure the funding. Fortunately, the current small business lending environment is favorable for entrepreneurs in search of capital. SBA loans, which are designed to help companies secure financing by mitigating lender risk, are being made a record levels.
Meanwhile, banks and non-bank lenders are approving loans are post-recession highs. With a solid overall economy and interest rates that are still relatively low (but slowly rising), borrowers are finding success in securing capital for small business growth. Big banks, usually the most conservative lenders, are approving more than one-quarter of the loan applications they receive. Community and regional banks are granting almost half of their funding requests, according to the most recent Biz2Credit Small Business Lending Index. For anyone who has dreamt of starting their own business but had put it off until the “most opportune time,” it may indeed be now.