As you prepare to purchase a business, there are many things to consider. First, partner with an experienced business broker to ensure a smooth sales process. Next, determine the right industry and business for you. Once you find a potential business to purchase, ask key questions to learn as much as you can about the business. Finally, be aware of red flags that could cause problems later on.
The process to acquire a business can seem overwhelming. While the decisions you make have a lasting impact on your future, there are some things to be aware of during your business search. Being prepared with the right tools and questions now can benefit your business success in the future. Consider the following tips when acquiring a business.
Work with an Experienced Broker
Most people understand the benefits of working with a business broker when selling a business, but a broker is just as beneficial for the buyer. If you are just beginning the process of finding a business to purchase, you may not know where to start. Unlike house hunting, businesses don’t typically put a ‘For Sale’ sign outside. Business brokers have access to a large network of businesses on the market. They know which businesses are good investments, and, most importantly, they will help you determine what the business is worth.
Some entrepreneurs have their sight on a particular business for sale, and opt to manage the purchase on their own. This could be a risky decision that ends up costing them in the long run. Often, a business may seem like a strong investment at first glance. However, a broker will know what to look for to understand if purchasing the business is truly a wise investment. In addition, a buyer working without a broker may not know the true value of the business, and end up paying way more than the business is actually worth. Working with a business broker ensures you’ll buy the right business for the right price.
Find the Right Business for You
When you acquire a business, you’ll likely be investing much of your time and energy into learning that business and growing it. For that reason, it is important that you take the time to determine the type of business that is right for you. Consider first the industry you are looking to enter. Think about your hobbies and interests, as well as the job experiences you’ve had in the past. The more you know about a particular industry, the easier it will be to transition into ownership. Your prior knowledge will provide a strong framework to relate to new employees and future customers.
Next, consider the right size business to manage. If you are a new entrepreneur seeking to own a business for the first time, a smaller, family-owned business may be the best fit for you. This allows you to focus more on the business itself, and the goods or services it provides, rather than managing employees. If you’ve previously owned or managed a business, you may be looking to purchase a mid-sized or larger company. While these businesses tend to result in higher profits, the process to buy the business, and then transition to full ownership, can be more complex.
To effectively run your business, you will also want to be sure that it works with your lifestyle. The first consideration here is location. Is the commute something you could handle on a daily basis, or would you need to relocate to manage the day-to-day responsibilities? In addition, consider the time commitment needed to run the business. Some businesses run best when the owner is in the office daily, while others can function well without the owner present. These are all important factors to consider when looking to purchase a business.
Ask Key Questions
As a prospective buyer, it is essential for you to learn as much as you can about a business before you make an offer. Think about what is most important for you to know about the business in order to make a decision. If you are working with a business broker or M&A professional, these may be part of the vetting process used to determine if the business is right for you. Some key questions are:
- How long have they been in business?
- Are they the original owner?
- What are the day-to-day responsibilities of the owner?
- How reliant is the business on the owner?
- How long have the employees been with the business, and what are their roles?
- What do the past three years of financials look like?
- What is the reputation of the business in the industry and the community?
- What skills are needed to effectively run the business?
- Will the owner be willing to assist with the transition after the sale?
Look for Red Flags
While it is important to learn all you can about a business before you consider purchasing it, some details should be of concern for both you and your business broker. For example, if you plan to purchase a family owned business, you may be wary of businesses where most of the employees are members of the same family. This could signal a mass exodus of workers once the ownership changes hands.
In addition, be sure to analyze the customer concentrations of the business you wish to purchase. Every industry has unique guidelines concerning customer concentrations, so it is best to speak with your business broker about the norms for your particular industry. However, when the majority of a business’s profit comes from a very small number of customers, this could be cause for concern, particularly if the current owner has a strong relationship with the customers.
Other red flags include anything that could indicate poor management. From unorganized financials to a workshop full of broken or outdated equipment, if you see a list of problems from the beginning, it could be an indication of mismanagement, from either the owner, the employees, or both. While no business is perfect, work with your broker to determine what can be overlooked and what is a cause for greater concern.
What to Think About When Buying a Business
Whether you are purchasing your first business or you’ve been an entrepreneur for years, there are many things to think about when acquiring a business. First, consider working with an experienced business broker, who will not only find businesses for sale in the industry you are searching, but they will also vet the business to determine if it’s the right investment for you. Be sure that the business you plan to buy fits your personal circumstances and your goals for the future. Ask key questions to learn as much as you can about the business, and be wary of red flags that could signal concerns down the road. These considerations will not only help you to purchase a business, but to run a successful business for years to come.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
Feel free to reach out!