While many people choose to build a small business from the ground up, others prefer to purchase an existing business as an investment, or even as a main source of income. Before you actually sign any papers and assume ownership, it is important to investigate the business opportunity thoroughly. Here are some things to keep in mind.
First, there is the matter of your own experience and skill set to consider. While there is no rule that says you must buy a small business that is part of an industry where you have a degree of expertise, the fact is that the better you understand the business and the consumer market associated with it, the better chances you have of being successful. Even if the business you have in mind is currently profitable, there are no guarantees it will stay that way if you lack the basic skills needed to keep up the momentum.
Even if you have extensive business experience, chances are you will need to broaden your range of skills somewhat. For example, you may be proficient when it comes to ordering inventory and creating effective advertising, but have no idea on how to create and maintain a proper accounting system. Even if the plan is to hire an accounting firm to keep your books, take a course in basic business accounting at a local college or trade school. It will make it much easier to understand what your accountant is telling you.
It is important to determine the current business volume of the business in question. In order to get a really good idea of how well the business is doing, you want to have at least three years of sales figures to track the upward and downward income generation trends. Ideally, those figures will be broken down by months or quarters, allowing you to get an idea if there are seasonal or other factors that prompt consistent changes throughout the year. At the same time, compare that data to the general economy in the area, and see how those conditions affect the profit margin of the business.
You also want to have a firm handle on the amount of expenses involved in operating the business. This includes fixed expenses such as facilities leasing, utilities, and various support services like insurance. Solid estimates of variable expenses, like inventory costs, are also important to consider. By comparing income to expenses, you can get a realistic idea of how much profit you can reasonably expect to make throughout the calendar year, which in turn helps you to understand what you can expect in the way of personal income from the business.
Also look into the current level of indebtedness associated with the business. You don’t want to start your ownership with liens or other huge expenses looming. Make sure the debt load is reasonable; if at all possible, work out a deal where the owner pays off outstanding debts up to a certain point as part of the sale agreement. This will allow you to start fresh, and be positioned to maintain the success of the company during and after the transition of ownership.
As part of the overall assessment, consider the current location of the business. While it may have been ideal in years past, will that still be the case ten years from now? If the area is holding up well and the business can remain profitable in its current location for several more years, that is to your benefit. However, a business that is in a declining area of town may lose a great deal of its customer base in a few short years, leaving you with something that is barely turning a profit and will prove hard to sell.
Most of all, never allow yourself to be rushed into a decision. Only after examining the books, verifying the current profitability of the business, and having a reasonable degree of assurance that the business will be profitable over the long term should you proceed with the purchase. If undue pressure to buy is applied, see that as a sign that something is not quite right, and look for a business opportunity elsewhere.