Most people consider owning a business at some point in their lives. Every year, over 500,000 businesses change ownership. And the progression of numbers show that this figure might skyrocket in the years to come.
A majority of Baby Boomers who owned businesses up until now are retiring and handing businesses over to younger individuals. At the same time, business management is undergoing a massive shift, and the outdated skill sets of Baby Boomer owners aren’t enough to catch up.
Essential pointers to consider before buying a business
If you’re thinking about buying an existing business rather than starting one of your own from scratch, there are some key factors you need to focus on. I will share some essential tips to keep in mind.
Why am I really buying a business when I could just start one?
This is a question you may ask yourself, or your neighbors, family and friends may bombard you with, when you plan on buying a business. When you buy a business, you cut out most of the initial investment of time, money, and effort required for things like finding and renting a location, or hiring employees so you can hit the ground running.
What are my reasons to buy a business?
There are pros and cons involved when you are considering a business. Let’s look at a few:
- There is already a proven business concept in place
- No need to worry about buying property, inventory, equipment, building a customer base, etc.).
- Faster time to generate revenue / cash flow
- Existing foundation of intellectual property
- The Cons:
- Purchasing cost may be high—possibly more than the initial investment it would take to start the same business from scratch.
- No matter how much due diligence you do, there may be existing issues that you don’t learn about until it’s too late
Watch out for the business type
The type of business you buy is also an important consideration. If you buy a sole proprietorship, an LLC, or a partnership, then you are basically buying only the assets of the business, not the liabilities. If the debts of the business are not covered by the proceeds of the sale, they are still the legal responsibility of the previous owner unless specifically negotiated otherwise.
All outstanding obligations and liens should be dealt with by the previous owner, and specific exemptions should be made for the new owner from liability for costs associated with the case or from any repercussions resulting from legal or jurisdictional decisions.
Before you buy a business, check thoroughly
Before you buy almost any product you probably check for an expiration date, review the nutrition chart, etc. Buying a business is a much bigger deal, and if you happen to slack off on your diligence, you might end up paying a very heavy price.
Check for necessary business licences and permits and ensure they are up-to-date. If you fail to check on these, the task of paying them off will fall on you and add unnecessary additional costs to your business purchase.
Check the zoning laws and make sure it is legal to run a business at the location. It just might be someone trying to shift the burden their illegal activities onto your shoulders. Also make sure you ask for and review existing contracts and leases, environmental regulations, and other relevant documents.
You can even run a SWOT analysis before buying a business. SWOT analysis focuses on the potential strengths, weaknesses, opportunities and threats to a business. Looking into this will enable you to decide if the business you plan on buying is really worth it or not.
Am I overpaying?
You should thoroughly evaluate the business you plan to buy before making a decision. Get a professional estimate so you have some sort of benchmark for the fair market value of the business.
Final thoughts on buying a business
Buying a business is a huge deal. Getting all loose ends covered is essential when making such a huge investment. What matters is how vigilant you are throughout the process. You have to understand the business you are considering so you know the right questions to ask and the pitfalls to avoid.
Buying a business can be a make or break decision, depending upon your market evaluation and understanding. If you get it right, you might just be sitting on a diamond mine that the previous owner assumed to be mere coal.