4 Things You Need to Know Before Buying a Small Business

by Beth Rifkin

2 min read

As an entrepreneur, it is likely that at least once during your career you will face the prospect of purchasing an existing business. While buying an established company presents you with less risk, it usually incorporates a larger cost base. To mitigate these risks, perform the following four actions before acquiring a business:

Fully Investigate Why You Wish to Buy This Business

There could be many factors driving your will to purchase a business. Whether you see it as an investment or simply just have a penchant for the industry, you should broaden this self-examination to ensure that the company complements your strengths. For example, if the business operates within the retail sector, ask yourself if you have the patience and customer service experience to handle clients and vendors. Study your own business acumen as if you were an impartial observer. Maybe you have skills in accounting and budgeting, but lack marketing experience. In this case, you may want to consider hiring a marketing professional or finding a mentor to assist you in your area of weakness. It’s also always smart to consider the firm’s size, location, and the lifestyle you would be required to lead if you bought the company.

Determine Your Capital Requirements

Besides from the capital needed to cover the company’s cost base, you’ll also be required to raise working capital to pay for expenses, such as inventory, rent, payroll, utilities, and more. By analyzing your present cash flow, you can start to determine how much you can afford, versus the amount of money required to operate the business. Review the current owner’s accounting ledgers, and discuss the monthly and annual costs of running his or her business. Additionally, you may want to seek out financing options, such as business loans and venture capitalist investment, if you believe the firm could give you a great return in the future.

Comb through the Financial Statements

Before seriously considering a business for purchase, you or a business accountant need to closely analyze the company’s financial statements from the previous three to five years. This includes the firm’s balance sheet, tax returns, statement of profit and loss, and any current leases or contracts on the books. It is dangerous to trust a company’s own financial analysis, so it’s best to have these statements analyzed by a business accountant.

If you have yet to review the firm’s financial statements, ask for the present owner’s permission to administer an independent audit yourself. Be wary if the owner is flustered or straight out refuses your request. This behaviour indicates that he or she may be hiding something, in which case you should drop all consideration towards the purchase.

Contemplate an Exit Strategy

An exit strategy may be the last thing you want to consider as an entrepreneur. However it is very likely that if you purchase and succeed in operating the business, it will outlive your working life. Examine the company and evaluate the courses of action required to get the firm to a point where it is either sellable, profitable, or a combination of the two.

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