This is the first of two articles by Rochelle Robinson detailing the process of buying an existing business.
For potential entrepreneurs, buying an existing business may be the best way to get started quickly by skipping most of the startup work.
The good part of buying an existing business could be positive brand recognition, a strong customer base, trained staff and a well-established network of suppliers. The bad part could involve pre-existing financial, legal, or contract issues, negative brand recognition and challenges with the staff or vendors.
Buying an existing business could be a good idea as long as you research to fully assess the company's complete financial performance and overall value.
Before you plan on purchasing an existing business, ask yourself the following questions:
- Does the business genuinely interest you enough to spend countless hours working there?
- Can you get started right away, or will you need to attain certain skills or licensing?
- Are you more left-brained or right-brained? Are you better with handling the finances instead of sales? What positions would you need to fill?
- Do you have connections with suppliers if the existing relationships dissolve?
- Are you familiar with the industry – is it growing?
- Who is your competition? Do they have similar resources and overhead expenses?
As with any major purchase, you need to do your research. Find out why the owner is looking to sell their business. Most small business owners have an attachment to their business and have probably spent an abundance of time, sweat, and possibly tears to build. Reasons vary but could include the owner having health issues or a highway bypass being built which would steer traffic away from the business and harm the business's viability. Some owners may fail to disclose critical information that could determine the success of the business. Don’t accept generic responses – become your own private investigator, and perform your own non-intrusive research.
Ask trusted friends and family to visit the establishment and provide you with feedback, talk to the staff discretely, and – if possible – talk to customers. If you plan on purchasing a dining establishment, check out the parking lot on a Friday or Saturday night to see how many customers the business has, and consider going in to check out the atmosphere. Are servers standing around while customers are being neglected? Was the food overcooked, or did it take too long to be served? Discretely identify potential challenges and opportunities. If you’re planning on buying a retail establishment, place an order to get the full customer experience. Take note of customer service, comparable pricing and the quality of goods.
Do an online search of the business including the business name, the physical address and the owner’s name. Perform a search with the Better Business Bureau and local court records for both the owner's name and the business name.
Use social media to determine more about the business – check for reviews on Facebook and any mentions on Twitter. Research the business's overall online presence. It may make your efforts more challenging if there are a lot of complaints or negative reviews about the business.
Research the industry, keeping in mind that technology is constantly changing traditional business models. Purchasing an existing book, video or record store may not be the best idea unless it has a targeted niche market. Research business competitors, and see how they compare to the business you want to purchase.
Researching the business that you want to purchase can offer valuable insight into the existing strengths and weaknesses.
Read Rochelle Robinson’s second article about due diligence and valuation.