Should You Buy an Existing Business?
When most people think about building a small business they usually think about starting it from scratch. But buying an existing company can offer the opportunity to move along the path to entrepreneurship more quickly. With many of the startup tasks already taken care of, a staff in place, an established customer base, existing vendor relationships, and processes laid out, you have a head start.
Buying a business in an industry you already know has many advantages. You will have a good read on the ins and outs of the market, the competitive landscape, and have an idea of what you are buying. Plus you have industry knowledge that can take you a long way in managing the business.
Business owners often get to an age where they are ready to cut back and yet don’t have a succession plan in place. By networking you can even find owners who aren’t actively looking to sell their company. For example, an auto industry corporate executive I worked with bought one of his customers, a local auto parts dealer, whose owner jumped at the opportunity to cash out his equity in the business. Another entrepreneur I met recently approached a medical supplies retailer he frequented and found him anxious to get out from under the debt he had incurred over years of running his business.
Buying an existing business doesn’t diminish the need to do your research before making a decision. It requires substantial examination to avoid the pitfalls of becoming an overly eager buyer. Here are just a few critical questions:
Why is the current owner really selling the business? Dig for the truth. A business owner may say that they have personal reasons (illness, retirement, etc.) but in fact have caught wind of an upcoming market change that will negatively affect revenues or cost structure. Uncovering the real reason for a sale may be difficult, but could avoid making a big mistake.
What sort of reputation does the business have? When you buy an existing business, you’re getting the brand reputation along with it. That will either work for or against you. Turning around an existing business’s poor reputation can be difficult and take years. If the business has a favorable reputation, find out what has made it so. A strong reputation based on personal relationships between the owner and customers might not easily transfer to you. Be particularly careful if the business relies primarily on a few key customers or suppliers.
What is the competitive landscape? Who is this business competing against? Where are they located? What are their strengths? Are there any competitive trends in the market? Even though it’s an existing business, you still need to investigate many of the same questions you would if you were starting a new business.
How is the business doing financially? Get as complete a financial statement as possible and ask for tax records to back them up. If the business has been losing money or hasn’t been generating a satisfactory profit, you’ll want to dig deeper into the reasons why. Create contingency clauses that shield you from issues such as unpaid taxes or obsolete inventory.
Are you getting what you need to seamlessly take over running the business? Make sure the purchase will include essentials such as: leases and contracts; customer lists; patents, trademarks, service marks, and trade names; key employees who are vital to the business; and other important components.
When you are ready to move forward (and don’t be shy about backing out if you are not 100% committed) then you will need to structure the deal and create a purchase contract. There are a lot of options to consider such as buying the business entity vs. buying its assets, contingency clauses, and sellers’ earn outs. Consider tapping the expertise of your local SCORE mentors who can help you assess the opportunity and work through the process. Feel free to reach out to your local SCORE chapter at www.score.org or call 1-800-634-0245.
For more than 50 years, SCORE has helped more than 11 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 11,000 volunteer business mentors in more than 300 chapters serve their communities.
Like what you are reading?
Subscribe to Rhode Island SCORE's twice monthly blog posts click here to Subscribe >