Think You’ve Found a Business to Buy?

Think You’ve Found a Business to Buy?

Here’s Your Guide to Ask All the Right Questions
About Yourself, the Seller and the Business
(First in a series of at least two articles)

6 Categories of Questions Buyers Will Ask …That You Must Be Prepared to Answer

Buying your own business, especially if it’s your first time as an entrepreneur, is a daunting undertaking … but not impossible given the right planning and execution. There are a lot of moving parts to consider including a careful analysis of physical assets, financial statements, strengths of management, employee engagement … and relationships with customers, the community and competitors.

Note: There are two broad categories of business buyers … financial and strategic.

Financial Buyers are investors/operators interested in the profitability, cash flow and future exit opportunities.

Strategic Buyers have a long-term business view of how your company may fit into their plans toward diversification, eliminating competition or enhancing its own shortfalls.

This article is directed at Financial Buyers.

Buying a Business … The Good News

There are significant advantages to buying a business, particularly if you are a first-time entrepreneur. When you pull the trigger and buy an existing business you are an instant entrepreneur without the same financial and emotional risks of launching a new enterprise.  Among the primary benefits are:

Recognized brand identity

  • Established relationships with both customers and suppliers
  • Easier to obtain financing given a good history of profitability
  • Immediate cash flow from current operations
  • A building or office space
  • Inventory and equipment
  • Customer base
  • Vendor and supplier base
  • Existing employees who can share their knowledge and expertise
Buying a Business … The Less Than Good News

There are always the “gotchas” that surface after the fact, so to be forewarned is to be forearmed. Anticipate the potential for the following:

  • The cost may be higher than starting from scratch as often you are buying “goodwill.
  • Existing problems can be hidden until after the sale.
  • Inventories may be obsolete due to their age
  • Equipment may be faulty
  • Steeper learning curve than expected

 

Hang-in … in a bit we’ll tell you how to catch most of these problems before going to the closing table.

Time for a Reality Check

Maybe you’ve found a business that you think you’d like to buy, or been presented with one by your business broker/advisor. Alternatively, perhaps you have an interest in a particular industry or a general inclination of liking a type of business, e.g. “Wouldn’t it be great to run a Bed & Breakfast” or your very own restaurant.

OK … so that brings us to time for self-examination … meaning what questions should you be prepared to ask yourself and respond accurately with research, knowledge and gut-check comfort. That exercise will better ensure that you seek a business that dove-tails with your interests, abilities, financial wherewithal, professional goals and family considerations.

Here’s an eleven point outline to help formulate your decision matrix.
  • Why is the business for sale?
  • Why do you want to buy this business?
  • Can you afford to buy the business, given your financial and family constraints?
  • Will the owner consider financing all or part of the purchase price?
  • Do you have adequate third-party financing resources to consummate the purchase?
  • Would starting a similar business be a realistic alternative?
  • Do you have the interest, experience and physical energy to make this business successful?
  • What does the competitive landscape look like?
  • Is the business “trendy” or exhibits a long-term outlook to endure?
  • Is it a “life-style” business that becomes your job, or one with the potential to build an asset?
  • Will you buy and run the business on your own or with a partner(s)?

 

 

Your answers to these questions will go a long way to help synthesize your thinking about a particular business or generalized (often emotional) attraction to a certain class of businesses.

Note: You don’t need to seek all these answers on your own. Your trusted advisors, family members, successful business owners and research based on expert knowledge are all valuable resources.

Call upon their assistance … you will likely be met with enthusiastic responses to help.

6 Categories of Questions You Must Ask the Seller

Once you have completed your reality check to your comfort and satisfaction, your next challenge is the hard work of due diligence. Whether you have past success in buying a closely held business or are relying on the proven professional capabilities of a seasoned business broker/advisor, it is an absolute must to get solid answers to questions regarding the six major drivers of business value.

  • Company Organization
  • Books and Records
  • Systems
  • Policies and Procedures
  • Personnel and Clientele
  • Marketing and Sales

 

Incomplete or negative responses puts a check mark in the “Caution” or “Do Not Proceed” column of your evaluation checklist.

Stay tuned for our next issue and profit from a comprehensive roadmap of questions to ask the seller.

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