Entrepreneurs are often presented with the choice of either buying a small business or starting their own business from the ground up. Unsurprisingly a lot of entrepreneurs will opt to purchase a business instead of starting their own. Although it isn’t as glamorous as starting your own business, buying an existing small business allows you to save a lot of time because you don’t have to hire staff, create a customer base, or build up a reputation and brand name. But there are some questions that prospective business owners should consider before taking the plunge and buying a small business.
Do you have the skills to run the business?
This should be the first question any entrepreneur asks themselves before they commit to buying a business. Consider the nature of the industry that the business operates in. If the small business you want to buy is a retail store, consider whether you have the skills necessary to negotiate with suppliers and market to customers. So, if you have a solid grasp of the financial side of the business, you may want to consider bringing in a marketing expert or someone who can help compliment your own skill set. It can be hard to analyze your skill set and remain neutral, but it is important you try. You do not want to buy a business, only to find out that you lack all the necessary skills to keep the business profitable. Even if your plan is to quickly flip the business for a good profit, then you still need skills in order to make the business as appealing as possible to would-be buyers.
Do you have a coherent, realistic plan for the business?
Before you actually hand over the check and become the new owner of the small business, you should develop a coherent and realistic plan for what you want to do as the new owner of the business. Where do you want the business to be in a year? In five years? In ten years? Come up with ideas for how to actually enact and reach the goals you set for yourself. Come up with some areas that you think the business is failing in, and come up with ways that you could improve in those areas.
Does the business have a future?
This is another important question that you need to consider. Small businesses are highly susceptible to outside circumstances. For example, maybe the business caters to a certain demographic, but that demographic may be leaving the local area in large numbers for better opportunities elsewhere. Another possibility is that a big competitor may be coming into the market; a big chain store or a huge shopping mall can really hurt local small businesses. As part of this, you may also want to investigate why the owner is selling, they may have knowledge that the business will be going under in a few years and they want to get out as quickly as possible. You also need to look past the small business, and at the wider industry itself. Is the industry dying? Is there some new technology or trend that is going to completely revolutionize the industry and put you out of business? These are important questions to consider when buying a small business.
What does the community think of the business?
Part of buying a small business is figuring out how that business is perceived by the local community. If the business has a negative reputation, you are going to need to figure out a strategy to improve its reputation or find another business to purchase. But, how can you actually get a good idea of what the community thinks of the business? Well, you can always do it the old fashioned way and ask members of the local community what they think. Another method would be to look at local news, and see if the business is involved in any local outreach or community programs.
What is actually being sold?
You have to consider what the owner is actually selling you. Are you simply engage in an asset sale, or are you getting everything? This is important to consider because if you are just buying assets, you do not have to take on any of the business’ liabilities. If it’s the other way around, then you need to factor in potential debts and other things that you may need to pay off.
How did the owner come up with their business valuation?
Business owners can come up with different valuations depending on what method they use. So, it is important that when you are buying a small business, that you never take an owner’s valuation at face value. Instead you should get them to give you an idea about how they came to that valuation. If possible, you should get access to as many financial records as possible (earnings projections, tax information, etc.) and come up with a rough valuation of your own.
Do you have a contingency plan?
It may seem strange to develop a contingency plan before even purchasing a business, but it is actually quite a good idea to do so. Businesses can be quite volatile, especially small businesses, and in a very short span of time, a business can go from being extremely profitable to hemorrhaging money. So, even before you buy a small business, think about what you plan to do if for some reason or another you have to dump the business quickly. Think of ways to minimize the amount of money you will lose.
Of course, this is not meant to be a checklist of every question you need to ask before buying a small business. It is a starting point meant to get you thinking about what types of information you should get before you commit to buying a small business. Being an entrepreneur can be very rewarding, but it can also be extremely overwhelming if you don’t do the proper amount of research before committing to a venture.