Buying an existing business is an appealing alternative to starting a company from scratch. But choosing the best business to buy can be a difficult decision.
There are three important questions to ask to help identify the best business to buy and narrow down the list of potential companies:
Is the company a good fit for my skills, experience and future goals? It’s OK if you’re interested in buying a business that’s not a perfect match for your resume. But there should be something about the company that interests you, and there must be a way for you to contribute substantially to its success.
What does the company sell, and what’s its business model? Do you want to sell products, services or both? Understand the differences in how each type of company operates, and choose a business model that appeals to you.
Is the company successful, and does it have the potential to grow? Buying a struggling company and turning around its fortunes is easier said than done. Examine the performance of not just a company, but its entire market. If it’s not doing well, find out why and determine how much time, effort and money it would take to make it a success.
Don’t forget to consider franchises when choosing the best business to buy, either. There are some trade-offs -- you’re not totally your own boss, and you have to work within established guidelines -- but franchisees often get additional resources and support from corporate headquarters.
You shouldn’t buy a home without having a home inspection. And you shouldn’t buy a business without doing due diligence.
The due diligence process is where a potential buyer and their team – which typically consists of a lawyer, accountant and banker – perform in-depth research on a company to evaluate its financial and operational soundness and its potential for future growth. When approached correctly, the due diligence process will identify any problems that a preliminary evaluation of the business may have missed, particularly in these four key areas:
Finance: The buyer and their accountant should examine the company’s audited financial statements, tax returns and credit report. These documents will shed light on the business’ cash flow and profit margins – two of the most important factors in operating a successful company.
General company information: Lists of employees, customers and partners provide valuable insight into the people who make the business run. And the business plan, marketing plan and operations manual explain in detail the processes that drive the company forward.
Assets: A buyer needs to know about all the physical assets, real estate and intellectual property the business owns in order to come up with a proper valuation. Make sure any sale agreement explicitly spells out which assets will and will not be included as part of the deal.
Legal and regulatory issues: The current owner should disclose any past or current litigation the business is involved in, so the buyer and their attorney can properly assess their risk. The buyer and their attorney should also investigate the business’ compliance with all local, state and federal regulations.
