Rather than building a small business from the ground up, buying an existing company offers the opportunity to move along the path to entrepreneurship more quickly. With all of the startup tasks already taken care of, a staff in place, an established customer base, existing vendor relationships, and processes and procedures laid out, you have a head start.
But that doesn’t diminish the importance of doing your research before making the decision to buy a business. Acquiring an existing small business requires substantial examination so you avoid the many pitfalls that befall eager entrepreneurs who leap before they look.
According to William Comiskey, a SCORE Mentor at the Southwest Florida SCORE Chapter, “Investing in a business is the same as investing your savings in a mutual fund or stock portfolio to secure both your future and possibly your retirement. You study and review the past performance and the current condition and seek help and advice from professionals on the prospects for the future.”
Before purchasing an existing business, you need to get answers to some critical questions:
Why is the current owner selling the business? Seek the truth. If the business is in a declining neighborhood or the owner has caught wind of an upcoming market change that will negatively affect revenues or cost structure, you might put yourself at risk of failure from circumstances beyond your control. Uncovering the real reasons for a sale may be difficult. Be wary and realize that smart business owners don’t often walk away from profitable endeavors unless they have strong personal reasons (illness, retirement, etc.), or they have received offers that are too good to refuse.
How is the business doing financially? If it has been losing money or hasn’t been generating a satisfactory profit, you’ll want to dig deeper into the reasons why. Unless you’re confident you can operate it more profitably than the current owner, you might end up with a sinking ship on your hands.
What sort of reputation does the business have? When you buy an existing business, you’re getting the brand reputation along with it. That will either work for or against you. Turning around an existing business’s poor reputation will be difficult and could take years—and it might even be impossible depending on how negatively the company is perceived by customers, suppliers, and the public.
If the business has a favorable reputation, find out what has made it so. A strong reputation based on personal relationships between the owner and customers might not easily transfer to you. Be particularly cautious of this if the business relies primarily on a few key customers or suppliers.
Are you getting everything you need to seamlessly take over running the business? Find out if the purchase will include essentials such as: leases and contracts; customer lists; patents, trademarks, service marks, and trade names; key employees who are vital to the business; and other important components.
As Comiskey suggests, you don’t have to embark on the process alone. Consider tapping the expertise of professionals (such as SCORE mentors) who can help you assess the opportunities and risks of buying an existing business.