Running a successful business does not require starting from scratch anymore; smart investors consider buying an established business a better deal. By taking on a business built by a previous owner with existing customers, you can have your own business without the hassle. There is no daunting task of brainstorming a new idea; no frustration of hiring employees; a lot fewer legalities to navigate; and a higher chance of success. These factors are enough to prove why buying a business already set up has become a popular business model.
More than 500,000 businesses change hands every year, and this number is expected to skyrocket. However, buying an existing business involves big money that comes with a big risk, so it’s critical to assess everything with a clear mind.
This article is all about what to look for when buying a business for higher chances of making it a success.
6 Things to Look for When Buying a Business
Be Clear on Business Criteria
It’s essential to begin with a clear sight of what type of business you want to overtake, the industry you want to be in, and the business operations you are interested in managing. It’ll help you funnel down the options.
Also, decide if you want to buy a new business struggling to grow or one that has been around for years with an existing company reputation and existing customer base. In case you are not sure between the former and the latter, a reliable broker can help detail the pros and cons of each.
Evaluate the Financials of the Business
Delving deep into the financials is an important part of researching and buying a business. From going through the financial statements of the past five years to evaluating the net profit, losses, cash flow statements, and expenses, you should understand every aspect.
Having an accountant or business broker by your side will be helpful to understand the financial statements better. Ask them to highlight the red flags and anomalies in order to make an informed choice when buying a business.
A few other things you should consider:
- Advertising costs
- Any business loan taken out for seller financing
- Accounts receivables and sales records
- Debt disclosures
- Tax returns (past five years preferred)
- Business acquisition loan (if you are interested in buyer financing )
Assess the Business’s Assets
Whether you want to own a business on a small or large scale, evaluating the assets is something you can’t skip. You should know exactly what you are getting in the transaction. Only show interest in buying businesses that come with a detailed spec sheet listing all assets.
When dealing in intellectual property, ensure that the brand’s name, logos, and other trademarks are copyrighted and included in the deal. Be sure any patents are included as well.
Know About Its Liabilities
Buying a business without knowing its liabilities can quickly turn into a situation, thus, you should know about all its vulnerabilities. For new buyers, it can be pretty daunting to evaluate the liabilities, which is where a broker can help.
When buying a business, have a reputed broker involved and ask them to conduct due diligence. The broker will help you know more about a business’s liabilities in detail.
Check for Regulations in the Area
Before finalizing the deal, ensure that the business acquisition you are making doesn’t fall under restricted zoning. Some areas have stringent rules for certain businesses, like nightclubs and bars, which can’t be located anywhere near a residential area.
Another thing to consider is the environmental regulations. For example, businesses must adhere to the Clean Air Act, the Clean Water Act, the Pollution Prevention Act, and so on. Make sure you are willing and able to comply.
Look for Licenses and Permits
One of the reasons for acquiring a business is to steer clear of the frustrations of applying for licenses, and if a business does not hold the correct permits, it might not be worth the investment.
You should go for legit businesses that produce licenses and other documents when you ask for them. It’ll help you save a huge sum of money while making a business purchase. You can ask your broker to contact the business owner regarding the latest permits and licenses.
Understand Why the Owners Are Selling the Business
Lastly, it’s suggested to find out and understand the reason why the current owner is selling their venture. Some small business owners have a history of setting up a business and selling it, whereas some have trouble with small business administration and failed management.
What Are Business Brokers and the Benefits of Hiring One?
A reliable business broker can help you navigate the ins and outs of buying a business. They will have experience in existing business acquisition and can help you evaluate a business, check its financials and liabilities, and do due diligence to make sure it is a sound investment. A broker can also provide valuable insights into the market dynamics and opportunities available.
At Armen Nazarian Business Brokers, we help investors buy small, medium, and large independent businesses. We’ve been in this industry for many years and have the expertise to help you with everything required to analyze a business and purchase it.
We maintain confidentiality, follow up with the interested parties, and do proper evaluations depending on the current market’s trends. Contact us online or call us at 248-231-7714 for an initial consultation.