Things to consider when buying a business

Last week (insert URL) I talked about two options for a first-time entrepreneur. You can buy a business or start a new one. This process has a lot of things to consider. You need to first decide which of those two paths you are taking. Then, if you are buying a business, there are a whole bunch of other things to consider when buying a business.

Before we get to those items, understand that this is not a comprehensive list. I don’t know your personal circumstances, experience, or skill sets. But, hopefully, by going through these five questions you will be closer to understanding if this is the best path for you.

What type of owner will you be?

Here I am not focused on the culture of the business. Instead, you need to understand how you will run the business. Will you run the daily operations or will you be a partially or completely “absentee owner”? If the former then you need to understand that you have simply bought yourself a job, not a business. If the latter then you need to make sure you have the skills to hire and oversee whomever you hire to run the business. You will need to trust that they can execute and that they won’t rob you blind.

Do you have the appropriate skills?

I mentioned this briefly above. The best way to make you understand my point is to use an example. When I was a commercial lender I financed a lot of business acquisitions. Often times it was well-paid professionals that were looking to build a business so that they could eventually escape their day job. For example, you might find doctors wanting to open up a chain of restaurants. But having an MD only makes you smart regarding the human body, not running a restaurant.

How will you finance the purchase?

There are lots of ways to finance buying a business. For existing businesses, especially those in traditional industries that don’t have high-growth potential, business loans are often the best option. Particularly SBA loans because they require less money down.

Is there room to grow the business?

How is the business performing? Are you buying a business at its peak or is it underperforming? One of the best ways to increase the value of the business is to buy one that is not performing as well as it should be and then leverage your skills to improve its operations and profitability. Think of it as buying a run-down property and rehabbing it.

Why are they selling?

Owners sell for a variety of reasons. Sometimes they are ready to retire. Maybe their kids, if they have any, didn’t want to take the business over. I’ll also witness businesses going up for sale because the owner got sick. Or, maybe they are selling because they are exhausted from running a business that isn’t growing or isn’t producing enough income.

How would you know if the last point is true? By reviewing their financial statements. If you see a business where the owner is barely able to pay themselves an income then that business might not be right for you.

Check out these links whether you are looking to start a business from scratch or finance the purchase of an existing business through business loans.