10 Things to Look For When Buying A Business

10 Things to Address When Buying A Business

Shopping around when you're looking to buy a business can be quite daunting. Most people say that buying a new business is one of the biggest investments of their lives, and one of the most important moments, emotionally speaking, as well.

Therefore, it's vital to approach this task with a thorough understanding of what you're looking for, and what you should avoid. The better prepared you are, the more likely you'll be able to turn your business into a real success.

1. A Price That's Fair

When most people start looking around for a business to buy, they probably have a price in mind that they're willing to pay from the very beginning.

Therefore, they judge everything in relation to this figure. If it's cheaper than what they expected to pay, they'll consider that they got a "good deal".
In reality, though, this number in your head is meaningless. To make sure that the price you're paying for a business is fair, you have to compare the price to the business itself and nothing else.

If the price accurately reflects the current market value of the business, all things considered, then it's a fair price. Prices that account for "future growth" are often suspect and should be investigated by a responsible appraiser.

2. Good Relations with Suppliers

Any business is only as good as its relationships with its suppliers. In some industries, like food service, this is especially true.

Without having strong relationships with suppliers, a business might find itself suffering from delayed shipments and have little recourse to turn to in order to appease impatient customers. Therefore, as you're looking to buy a business and checking out the assets that it has to offer, you should consider this to be among the most important of them.

A good work from the old owner to the suppliers can be sufficient to put you in good standing with them from the start, and suddenly, one of the hardest parts of starting a new business has already been taken care of.

3. Strong Employees

If you're purchasing a business that includes an established body of employees, it pays to make sure that they're actually good employees. Be sure that they know the ropes of their job, and that there's not a lot of company-wide resentment about your taking over operations.

You don't want to find yourself in a situation where your employees want you to fail and where you have to work against them.

However, if you can come by strong employees as part of a purchase deal, it's well worth the extra cost. You won't have to train them to know their job, and they'll even be able to show you a thing or two about how the business has historically been run.

4. A Detailed Business History

Just as you should look for a maintenance record when buying a used car, you should always look for a detailed business history when buying a business. Any business that doesn't offer one has something to hide; it's as simple as that.

A good business history will include information such as records of profits from the beginning to the present, any money paid in taxes, any outstanding debts, and a listing of all outside companies and contacts that the business has worked with.

5. A Patient Seller who Doesn't Want to Rush Matters

If you're in negotiations to buy a business and the seller seems to want to rush things along to the signing of the contract, there's probably a good reason for that.

Chances are that they know there are problems with the business that you will detect if you look too closely and they want to close the deal before that can happen. Likewise, never trust a seller who says they want to handle the sale in a personal "man to man" way; always involve qualified appraisers and attorneys who can spot problems before they arise.

6. A Business that Isn't Personality-Centric

You may be poised to buy the most successful business in your town, but if the business' success is predicated upon the personality of the old owner, it's not going to stay successful for long once you take over.

For this reason, try to avoid buying businesses where it's plain that the major reason for their success is the personality of the owners. If you do, you'll find yourself having to work doubly hard to come out from under their shadow and win over their client base who are going to be looking at you with an exceedingly skeptical eye.

7. A Seller Who Wants to Stick Around for a While

One of the best assets you can have as a new business owner is a direct line of contact with the old owner. Running a business is complex so it's almost impossible to cover every contingency before the sale is actually made.

The reality is that things are going to come up that you won't yet know how to handle, and if you have access to the old owner, they'll be able to advise you about how they're dealt with such matters in the past.

In fact, many business sales include a clause where the original owner will be kept on in an advisory capacity for as much as a year after the transfer of ownership, and this is something you should definitely consider.

8. Prepaid Expenses

Prepaid expenses are one of those notorious hidden charges that are bound to crop up when you're negotiating the purchase of a business.

They refer to things which the old owner has already paid up front for, but which he or she is no longer going to benefit from, and so they expect you to take over the cost. For instance, if the business has a contract with a telephone company for a year of service and you buy the business in the middle of that contract, you might be obligated to continue paying for it.

The same is true for matters like advertisements in the yellow pages. Of course, any prepaid expenses should be prorated, so that each party is only paying for the portion of the service that they actually get to use.

9. Hidden Taxes

Hidden taxes are a different form of the notorious hidden charge that takes many business buyers unaware. It's one thing to know what the rent or lease on a business will cost you, but quite another to know all about the regional tax codes.

Different states have different tax structures that you should be knowledgeable about, but more than that, different areas in the same town can even have different tax codes.

Furthermore, you might be subject to hidden taxes based on the kind of business you intend to run. Whatever the case, you should always consult with a qualified attorney to make sure that you know up front about all the taxes that you'll be expected to cover, so that you can factor them into your budget.

10. A Business That Doesn't Need You

Lastly we have a mistake that isn't quite so obvious, but is one that many people make. Untold numbers of people throughout history have bought businesses because they felt that business "really needed them".

This is an understandable sentiment, but also a terrible mistake! A business that "needs" you isn't really much of a business.

If you're buying a business, more often than not it's because you want to profit from that business and not have to work as hard as you would have to if you were working for someone else.

Therefore, you want to find a business where the previous owner has established self-sufficient systems and structures that allow the business to "run itself" more or less. Sentiment aside, the more a business "needs" you in order to run perfectly, the more likely that something is going to go horribly wrong during the first year.

Besides, do you really want the kind of business where you can't step away from it for more than a day at a time without risking it all falling apart?