Things to Consider Before Buying an Existing Business
So, you’re looking to buy an existing business, but you do not know where to start, what to look for and how to prepare yourself for the best investment possible. Purchasing a business is a significant financial endeavor, and one that should be undertaken with plentiful research, background checks and verification.
Buying an existing business is a big commitment but if you do enough research and preparation beforehand, can result in some great returns. Here is a useful list of some key tips and considerations to keep in mind before you buy an existing business.
Look into the business’s public records
This is the most preliminary research you can do on a business by yourself. The information in public records can be crucial in the early stages of your buying decision.
Public records for businesses include important data such as real estate records and history, professional licenses, equipment liens, judgments, and court records. All of the aforementioned information can help inform you of the financial state of the business. It will also tell you how much money you need to invest in it to get the business to the state you want it to be.
Public records are a much undervalued and underknown source of important business information. Any incorporated for-profit business or non-profit organization will have its public information available on your government’s corporation agency.
No matter how private or obscure they may seem to be, every legal, incorporated business leaves a paper and electronic trail of corporate filings, business licenses, financial statements, complaints, lawsuits, and other documents. Much of this information can be accessed online via your government’s website.
There is a lot of information you can unearth by digging around into a company’s public records. Here are some things you should be mindful of.
Do they have any outstanding debts or liabilities?
These records will be able to tell you if the business you are interested in owes anything to anyone. It is important to find out if the business has any standing debts to pay or a history of nonpayments. Not only does this affect the financial situation you are getting yourself into if you do choose to purchase the business, it is also indicative of a possibly unstable or unpredictable business.
What is the legal status of their business?
Businesses come in many shapes and forms. It is useful to discern whether the company is owned by a corporation or LLC and whether you are purchasing assets to the company or the business itself.
Inform yourself of the total assets of the company
When buying an existing business, make sure to request a complete list of assets owned by the business. If you are unfamiliar with the industry, enlist the help of some experts to research the assets carefully. You might be buying a company that will require significant upgrades or expansions to operate profitably. The company might be over capacity or have outdated equipment. All of these scenarios are crucial to identify and assess before you make any business decisions.
Consider why the owner is selling his company
Any good businessperson is skeptical of the person they are making the transaction with. Asses the seller’s motive. Why are they selling their business? Much like you examine secondhand items to make sure they work, you would do the same for an even bigger purchase, like a business.
In this scenario, it is a good idea to be a bit cynical or negative. Are they selling the company because it is leading to a path of unprofitability? Does the company have a damaged or deteriorating public reputation? Are costs rising with operating the company that will soon eclipse its earnings? Some of these questions can be answered with data provided by the owner. Request sales records and quarterly reports to see what their profitability is really like. Refer back to public records to see if they have any legal complications with the government or other parties. Do some research with clients to see what their customers’ perception of the company is like.
Buying an existing business is a purchase that should not be taken lightly. Even if a business looks successful and promising based on a few reports, you should always look deeper into their financial and legal history via public records.