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Should you launch your own business from scratch, buy an existing company or purchase a franchise opportunity?

The interest in entrepreneurism is on the rise across America. Therefore, I have committed my last few columns on topics related to starting a business.  Should you launch your own business from scratch, buy an existing company or purchase a franchise opportunity?  In the last column I shared some considerations regarding the alternative of buying a business and I promised that I would provide some suggestions on the process of how to buy an existing business. 

First, I recommended finding a mentor to help with the process and will again share some good advice from Rieva Lesonsky. one of SCORE’s content partners and also the president and CEO of GrowBiz Media, a custom content and media company focusing on small business and entrepreneurship, and the blog SmallBusinessCurrents.com.

How to buy a business? 

So, where do you start if you want to buy a business? BizBuySell is the largest online marketplace of businesses for sale. You can also find a business broker by checking the professional organizations, such as IBBA.org, and its search for a broker tool or looking for For Sale By Owner (FSBO) opportunities.

As you begin your search, ask yourself these questions:

• Is it an established business or a turnaround?
• Are you willing to move to run a business?
• Do you have the necessary skills to manage a business?
• Does it fit your lifestyle?
• Do the earnings of the business you’re considering provide enough money for you to live on?
• Why is the owner selling the business?

Once you identify several businesses you’re interested in, call or email the business broker (or owner) to get more information. Remember, at this stage, you’re in a filtering process, so you’ll need to ask more questions, including:

• Does the business have a strong reputation?
• How’s the competition?
• Does it have a strong, established customer base?
• Does the business have recurring customers/revenue?
• Do the company’s top five customers account for most of its revenue?
• Does it have a fragmented customer base?
• Do they have a diverse source of suppliers?
• Does it have steady sales throughout the year, or are sales seasonal?

Once you’ve narrowed down your choices, consider:

• Don’t just focus on the financials. Remember, the business’s financials have been done to minimize taxes, not show earnings. Focus on the company.
• Don’t just focus on the bottom line. A company’s sales are vitally important.
• Focus on what you will do with the business: 70% of your focus should be on what improvements you can make to the business, and 30% should be on what the seller has done with it.
• Are you ready to make an offer?

Making an offer is the beginning of the negotiation—not the end. Offer a price you feel comfortable with, subject to due diligence. You should be able to write a check for the down payment. You’ll also need to check that you’ll have enough money after buying the business that you have enough money for your working capital needs and to live on.

After getting your offer, the seller may ask for a larger down payment, shorten the payout period, or have other demands.

Once you and the seller agree, it’s time for your final due diligence:

• Ask your accountant or hire a CPA to help verify financial information
• Verify the company’s earnings (look at tax returns, P&Ls, bank statements)
• Verify the gross sales
• Verify the contracts, business obligations, and customer mix
• Verify an acceptable lease transfer, industry non-compete, and training & transition period for new management
• Verify you’re buying a typical inventory level and that all equipment is in working order

Once you and the seller are satisfied, you can close the deal and get ready to take ownership of the business.

Don’t try to do this yourself. Get the help you need from an accountant, an attorney, and a SCORE mentor.  Remember that when you buy an existing business, you take over all its assets and operations. You can even keep the same employees in place if you (and they) prefer. You can buy a floundering business whose owner wants to get out, or a thriving business whose owner is simply ready for a life change.

Keep in mind, when you buy an existing business, you’ll have to manage a transitional period and convince employees, partners and customers that you can run the business as well as (or better than) the previous owner. There are likely to be personnel challenges, as you may need to replace some (or all) employees.

Last, but not least, buying an existing business can be very expensive. However, if you have the necessary capital and do your due diligence beforehand, buying a business could be your ideal solution.