Many people are attracted to the idea of running their own business as a means to gaining independence, especially office workers trying to juggle their boss’ demands, childcare, and managing a home. But sometimes people would rather buy an existing business than start a new one. That way, at least you know the business is up and running and viable, especially if it made it through the first five years when most new companies fold. Plus, the US’s Small Business Administration points out that interest rates are at an all-time low, so bonus points for Americans looking for financing.
The number of small business startups nearly doubled during the pandemic, giving a lot of hopeful business owners an excellent opportunity to pivot their working direction and realise their passion.
Whether you’re buying a business for the first time or adding another business to those you already own, there are important questions to ask. Here are 10 things to consider before buying someone else’s business.
1. What do you actually get?
Acquiring a business can mean anything from purchasing the business name to acquiring an entire business premise and workforce. It’s vital to begin with a clear, written contract that specifies what is and is not included in the sale.
Don’t be embarrassed to ask for clarification if anything seems unclear, and do get legal advice to make sure that everything is watertight.
2. Does the brand have a good reputation?
A business is never just dollars and cents, but also a brand with a reputation, no matter how small the company is. It’s much harder to reverse a business’s poor reputation than to correct its finances, so do your research.
Search social media and review sites for customer feedback, ask the business’s partners and suppliers for their opinions, and find out what other local businesses think about the company you are considering buying.
3. What is the full market landscape?
Buying in a market that’s predicted to grow is a lot more likely to bring success than buying in a stagnant or contracting market, regardless of the size of the business itself. Look for hard metrics about addressable audiences, total market size, and market growth forecasts.
You should also examine the business’s position in relation to the competition. You may want a strong business with a sharp competitive edge, or you might enjoy the challenge of buying one with room for improvement. What matters is that you know what you’re getting.
4. What is the debt to equity ratio?
There are a number of financial metrics to consider when buying an existing business, but one of the most important is the debt to equity ratio. This means checking that the company has more assets than liabilities or debts. This is critical when you’re looking to buy a business.
If the debts way outnumber the assets, you’re likely to struggle to make a profit even if you bring in a respectable income on a regular basis. That said, if there are slightly more debts than assets, and you are confident that you can raise enough revenue to pay off a significant amount of debt quickly, you might still decide to go for it.
5. How do the historic financial records look?
It’s vital to look at both the business’s short-term, most recent financial documents and their longer historic financial records. If the business recovered quickly late 2020 after the shutdown in the spring, it bodes well for its recovery after subsequent waves of the virus.
Equally, if the company survived the 2008-2011 financial crisis, there’s more reason to expect that it will make it through an economic recession.
6. What is the workforce situation?
If you’re buying a business with existing employees, make sure you know as much about them as possible.
Find out what roles there are within the business, who fills each one, their working relationship with the current owner, and what their contractual and actual responsibilities are (since these may not be the same!).
Look carefully for skill gaps and unnecessarily overlapping tasks, and read through employee contracts to decide if it’s necessary to restructure your workforce, and if so, how best to go about it.
7. Are there healthy growth projections?
There’s no such thing as standing still in the world of business. If you aren’t moving forward (and that could be going digital, working less, outsourcing, partnering or scaling) you’re going backwards, so make sure there’s room for growth for your prospective business.
Examine how best to grow your audience, either by branching out into new locations or adding new product or service lines to your offerings. There are many different ways to achieve this growth.
8. Has the business undergone a digital transformation?
COVID-19 accelerated digital transformation, and that’s not likely to change. Are you buying a business that has already embraced digital adoption, or is it lagging behind?
Neither answer is a deal-breaker — you might want a thriving digital business, but you could also be happy to buy one that’s quick and easy to flip with some relatively simple digital adoption strategies, like updating the website or adding a client portal.
9. Do you have working capital?
It always costs money to make money. Buying an existing business means you’ll need to put less into it than if you were starting one from scratch, but you’ll still need working capital for anything from adding more staff to updating the branding or pivoting to a new market.
Cash flow can be bumpy even with a generally good revenue, so it’s wise to secure working capital before you make the purchase, whether that’s from your personal funds or a business loan.
10. Why are they selling?
Finally, verify why the current owners are selling the business. Are they ready to retire or exhausted from steering a business through the pandemic, or is the business on the rocks or embroiled in some legal battle?
Even if the business has been poor for the past few months or years, it could still be a worthwhile buy as long as your growth projections are solid and you have the energy to drive it to success.
Buying an existing business can be profitable
Buying someone else’s business can be a smart way to become a small business owner or to expand your own business, but only when you go into it with your eyes open for pitfalls, missteps, or liabilities. Make sure you examine why you’re looking to acquire a business; have you longed for a lifestyle change, are you looking for more freedom, or are you ready to monetize a passion project? Are you looking to make a difference in peoples’ lives, or are you seeking a sound financial investment to set you up for retirement? Align your life goals with your business goals and ensure that the prospective purchase you’re considering will help you achieve those goals.
As long as you consider these 10 points, you could hit paydirt without the hassle of founding a new business yourself.