Deciding to invest in a business venture is a huge decision, and there are so many issues to consider it’s hard to know where to begin. Making a good investment depends on having all the available information about the business, and what its prospects for the future are. Here are a few things that you should make sure to research when you’re thinking about buying an existing business.
Why are they selling?
You know why you’ve decided that you want to buy a business, but what has made the current owner decide to get out? They’ll often give a simple reason like retirement, or health reasons, and sometimes those are perfectly valid. But sometimes, there is an underlying reason that the owner doesn’t want to share because they’re afraid you’ll be scared off. Is there new market competition that is likely to reduce the customer base? If so, the owner isn’t likely to tell you this if they want to sell you their business. If the owner doesn’t seem forthcoming about the reasons they’re selling, consider it a red flag.
Be aware of any regulations that affect the industry, and if they are likely to change anytime soon. New local tax laws could be getting ready to deal a huge blow to the profit margins, or economic sanctions in the government may reduce your ability to purchase necessary materials from a foreign supplier. These kinds of regulatory changes can destroy your chances for a successful business.
Where is the revenue coming from, and will it continue? Customer loyalty is a big consideration for any business. Are they likely to remain customers, or are they going to start shopping around for others to provide your product or service? Is a key customer already planning on leaving? This could be a reason for the decision to sell. The current owner is likely to give you a list of customers to talk to, and they might be very selective about who they tell you to talk with. Seek out some customers that aren’t on the list if you can, and see what they have to say as well.
One of the biggest things to consider is how you plan on dealing with current employees. Are you planning on keeping them on, or do you already know who you’re going to replace key management roles with? Employees will be nervous about their job stability, and if they’ve been around for a while, customers may be put off by having to deal with someone new. Know what you’re planning before you sign the contract, and be prepared to deal with morale problems and customer loyalty issues if you make too many changes. Sometimes drastic change is necessary to turn a business around, but there are consequences to stirring the pot too much when you first take over.
What don’t you know?
The biggest concerns are often the ones that you don’t think to ask about. We’ve already talked about some of the bigger issues, but there are infinite possibilities for things to cause problems. Maybe the location seems great because the new interstate will be routed nearby, only to discover later on that they had to make the road one-way and now you’re inaccessible. Often, it’s in your best interest to secure a local or industry business broker as a buyer’s broker if available; they’re like real-estate agents, but for selling businesses instead of buildings. A good broker will be familiar with any upcoming zoning or ordinance changes that will affect your business, and they should have connections that can help you answer any of the other questions that you have.
Though you may be excited about the prospect of buying a business, don’t be so eager that you overlook critical issues. There are a lot of things that need to be accounted for when building your business plan. Taking the time to fully research the business prospects will help you make the best decision.