Buying a Small Business

If you have your heart set on working for yourself, buying an existing business might be ideal, or it can be a nightmare if you are not prepared. Know what you want and investigate your options aggressively; Do a lot of research; the more you learn, the better your chances of success.

Analyse why you want to buy a business: Are you looking for greater independence, or the possibility of increased income, or both. Consider your own experience: It is more likely you will do well if you choose a business you are familiar with: Are you interested in a specific product, or service.
Check Web sites like to find interesting companies, and contact local business brokers to identify companies that may be for sale.

Perform a complete financial review of the business: This will typically include the company’s past income statements, balance sheets, and statements of cash flow, as well as the projected financials going forward. Look closely at all liabilities; as the new owner you are inheriting the company’s debt as well as its business. Work closely with an accountant familiar with businesses in the same field.

Get a  credit report on the company to evaluate its track record and to double-check its reported numbers.
Ask for a due diligence package, which should include past tax returns, any significant contracts the company has signed (including office or store leases) and any employee or contractor agreements. It will also include legal documents, such as filings, articles of incorporation, and any past or pending lawsuits in which the company may be involved. Work closely with a lawyer to evaluate these and other documents.

Ask why the business is for sale: Maybe the current owner is retiring, or is he hoping to pass off some ongoing problem; or worse, a fatally flawed business or location.
Focus on the problems: It is easy to be blinded by the appeal of a business, but pay just as much attention to the flaws; are they correctable, or could they be a constant headache?

Observe the business: i.e. If you are considering buying a bar or restaurant, watch the customer traffic for a week to see if it measures up to the revenue the current owner claims. Talk to customers to get their honest take on the product or services.

Use a business broker or consultant if you feel you need some help locating potential businesses for sale, or determining if the asking price is reasonable.
Prepare a comprehensive business plan if you need to raise capital: Banks and lenders will want to see detailed plans of how you envision future growth.

Determine the value of the business: Most industries have a standard method and concentrate on a multiple of the previous year’s revenue (the exact multiple will depend on the industry). If the business has a lot of capital equipment, the market value of the equipment is taken into account. Fast-growing businesses in a hot market are usually valued higher, as future potential is factored into the selling price.

Once you’ve determined a valuation, or come to an understanding on price, run your own analysis to see if it fits your needs. Calculate a break-even on the business: If you are ten years from retirement, it doesn’t  make sense to buy a high-priced business that won’t show decent returns for fifteen years.
Ask if the current owner will consider financing part or all of the sale: That can mean a low down-payment and an attractive payment schedule for you.

Consider proposing that the current owner stay on for a while after you buy the business if he or she is a real asset. Many owners stay on as consultants, and this can be an effective way to smooth over problems that may crop up during a transition of ownership.

Look for a business that has real growth potential: For instance, a pizzeria with limited hours might boom if it stayed open longer.
Once you buy the business, give yourself a chance to become comfortable with it. A drop off in income during the first few months of ownership isn’t a cause for panic.
Be wary of any business with incomplete or confusing financial records. That may hint at a poorly run operation or an owner who’s not eager to share all the facts. If something seems fishy, it usually is.