If you are an aspiring entrepreneur who has always wanted to own and operate your own business, buying an existing business can be a good option. There are many advantages to purchasing a business that has already been established. One of the most important being that they have already done all the initial startup legwork to make the business operational. Beyond that, an existing business has an established reputation in the marketplace, and a brand that people recognize.
Though purchasing an existing business offers many potential benefits, you need to make sure to pick the right one based on your passion, skills, and budget. This may very well be the largest investment you have ever made, so you don’t want to jump in to any random business that may be for sale. It is important to perform some due diligence to determine whether or not you are likely to be successful with it.
There are many things that need to be looked at before buying an existing business. Here are 7 important questions to ask the current owner/seller or their agent:
Why is the owner selling?
In many cases, a business that is for sale will already have a published reason for why they are selling. However, it is useful to ask the seller this question again. There are certainly many legitimate reasons for selling a business; e.g., retirement, health reasons, moving out of the area, and many others. Mainly, you want to confirm that they are selling for one of these types of reasons, and not because the business is in decline and they are trying to get out.
How did the seller determine the asking price?
It is important to find out how the seller arrived at their asking price. Hopefully, it was not some arbitrary figure based on how much they needed to retire on or something similar. There are three common business valuation methods:
- Asset Based: The value of all the assets the business owns.
- Income Based: The net revenue the business generates each year, typically using a multiplier of 2X to 3X.
- Market Value: What similar businesses are selling for in the area.
The seller may have used one of these or a combination of these with more weight given to one or the other. The right valuation method depends largely on the type of business, and the industry it is in.
What skills are needed to successfully operate this business?
This is one of the most important considerations when buying an existing business. It requires a buyer to take an honest look at their skillset and find out if they really have what it takes to successfully run this existing business. A business may be profitable today, but if it is not run properly, it may not be profitable tomorrow. Speak with the owner about what skills are necessary to get into this business and be sure you possess those skills (or someone close to you possesses them) before you decide to move forward.
What are the greatest challenges the business is facing, and what are its greatest growth opportunities in the marketplace?
There are two parts to this question, a more negative side and a positive side. You need to find out what challenges the business currently faces against their competition, and what will be required to overcome these challenges. You should also ask about opportunities the owner believes are available to grow the business in the future.
Is the seller willing to finance all or part of the purchase?
One of the downsides of purchasing an existing business versus starting a business from scratch is that it will typically cost far more to purchase a business that is already established. This could make it challenging to obtain financing through traditional sources, such as the local bank. Sellers can help with this dilemma by offering to finance part or all of the transaction. If you are searching for financing options, be sure to ask the seller if they are willing to do this for you.
Is the seller willing to stay on as a consultant or employee to help during the transition period?
Along the same lines of the last question, you might need some help (at least in the beginning) as you transition into owning and operating your own business. You might also need some assistance with the current employees and clientele. Keeping the seller in some capacity can help address these issues. Find out if your seller is willing to stay on in some type of role.
What legal contracts does the business have? And are there any unresolved legal issues you should be aware of?
As a buyer, you need to know what legal contracts you will be obligated by. One common example is the lease for your location. There may be other contracts with vendors for certain products and services over certain periods of time. You also want to find out if there is any pending litigation against the business or any other unresolved legal issues.
The Importance of Working with Skilled Legal Counsel
Purchasing a business is a major investment that involves many complications and numerous potential pitfalls. If legal mistakes are made during the purchase process or after you take over operations, you could end up with severe consequences; even the possibility of facing civil and or criminal charges depending on the situation. To ensure that you are legally protected from start to finish, it is best to work with an experienced business attorney. At the law offices of Davis, Bingham, Hudson & Buckner, P.C., we have extensive experience helping business owners in Alabama with all types of legal issues, and we work closely with our clients to help them successfully navigate the legalities of owning and operating a business. For a consultation with one of our attorneys, call our office today at 334-821-1908. You may also send us a message through our online contact form.