Launching into business ownership is not a one-size-fits-all experience.
There are many different paths to owning your own business. Some choose to secure a franchise in an established brand, with built-in name recognition, marketing, and loyalty. Others opt to build a business from scratch, taking an idea and turning it into a product or service that meets customer needs and wants.
And then there is a third option: buying an existing business. Doing so has its advantages and disadvantages. For those considering such a purchase, there are several factors to keep in mind. With a little bit of planning and a smart approach, there are things you can do to make sure the decision is the right one for you.
1. Know What It Means
Buying an existing business is often exactly what it sounds like. You take over the reins of an already established company and run it the way you want. However, you want to be sure to understand the financial implications (will the current owners retain a stake?) and potential downfalls. You also need to understand that it was not “yours” at the start and determine whether that is important to you.
Benetrends client Rick McVey purchased an existing business. Read his story
2. Learn the History
You want to be sure and understand the complete history of the business, financially and otherwise. Know how long it has been in business and if it has been in any other locations. Has it had a different business model in the past? Why did that model change? What has worked for the business and what has proven to be ineffective? How many employees has it had and why is that number different now?
3. Understand the Finances
Obviously, any business purchase is centered on the financials. You will want to gain a deep understanding of all its certified financial records, including tax returns, cash flow statements, balance sheets, plus the accounts receivable and payable. You will want to take a look at payroll records and employee personnel files, too. You will also need to review all major contracts, including those with customers, suppliers, and for leases of property and equipment. Finally, it is important that you understand if the company has faced any lawsuits, either as the plaintiff or defendant, and the outcome of those cases.
This due diligence is critically important and may require a review by a certified public accountant and an attorney to ensure you have an impartial take on the finances and that you explore any issues or concerns these professionals may have.
4. Assess the Customer Base and Prospects
You will want a clear understanding of the current customer base. Who are the biggest customers and what percentage of total revenue do they represent? Is the customer base diversified to withstand the cushion if a big player were to leave? What relationships does the company have with its customers and will the current owners help to ease the transition to you if you choose to buy the business? Understanding the nuances of customer relationships gives you a clear idea of where the money comes from and how essential your top customers are to the bottom line.
You will also want to understand the customer pipeline and the sales and marketing efforts in place to attract new customers. What has been effective and what has not worked? Are there potential customers that are close to signing on and what impact will the sale have on closing those deals?
For some companies, the owner is the face of the enterprise, either due to the relationships created and sustained, the marketing, or the identity of the business. For others, it is really not a factor as to who sits in the corner office, but you had better understand where your potential new company’s owner sits on the spectrum.
You will also want to understand why customers buy from the business. Is it price, service, convenience, location, loyalty, or some combination of these and other factors? Understanding what keeps the lights on and why is important to maintaining a strong strategy before you shake hands on a deal.
5. Discover the Skeletons
Sometimes the books, numbers, and stories just do not add up. This does not mean there is anything nefarious going on, but if the data and the narrative are not making sense, you will need to probe further. Was there some event that transformed the company one way or another? What was it and how did it change the outlook?
Be sure to understand any inherent risks that have already been identified. These can be market-driven, such as a competitor that has sprung up or has been vanquished, or the loss of an anchor tenant that is eroding the potential foot traffic in a mall or strip mall location. The risks may be environmental, such as whether the location is in a good part of town, whether there are robberies in the area, or whether street construction is hurting business. The risks can also be industrial, such as ongoing threats of a cyber-attack or new players who are threatening to encroach on your business model.
6. Look at the Assets
What is behind all those doors in the location in which you will be doing business. What is the available inventory of equipment, materials, and products? Seek to learn about the key approaches, messages, marketing strategies, or combinations of talent and access that have worked in the past. Are there secret recipes for success? (Whether it is a restaurant you are buying or a computer repair store, every company has a secret recipe.)
Be careful to look at purchasing just the assets, not the entire company, if appropriate. You do not, in most cases, want to be acquiring the debt and burdens of the existing company. Do not buy the existing corporation or Limited Liability Company. Instead, form a second company to acquire the assets. If the seller owes money or is sued, you are less likely to be held liable.
7. Why Are They Selling?
Be sure the story makes sense regarding why the current owners are selling the company. You may need to do some research, talk to some suppliers and customers, or trust your gut to be sure that the story you have been told is the full truth. Understanding why someone is selling is important.
8. Why Are You Buying?
Have you taken the time to articulate why you are interested in acquiring a business? Is it because you have always wanted to be your own boss, gotten tired of Corporate America, or are ready to try something new? Do you have a plan for how to improve, enhance, or expand the business you want to buy? Understanding your reasons for wanting to become a business owner are just as important as any other factor.
9. Define Success
What does success look like for you? Is it about making a lot of money? Helping a community? Providing a good living for you and your family? Knowing what you hope to achieve and how you will define success is important to help establish goals and priorities. And once the initial goals are achieved, be sure to create new goals. Success is an evolving process.
10. Is It a Match?
If you have a clear sense of your talents and abilities, then you are in a good position to make a smart business decision. That means taking stock of your strengths, weaknesses, and skill set. What do you bring to a new business from previous experiences that can apply to the work you would be doing post-sale? Are there skills you will need to acquire and how long will that take? Can you outsource those tasks that you either dislike or perhaps lack proficiency?
11. What Is Your Exit Strategy?
Knowing how to get out of a business is as important as knowing how you will get into it. There may come a time when you want to retire or get out of the business. Do you know what that will mean for you financially and logistically? Will you be able to bring the business to a point when you are the seller and can help another would-be buyer make the same decisions you are considering now?
12. Do You Have Financing?
Knowing the price point for the business is important, but you will also need funds for operating costs and to pay yourself a salary. Is there enough of an existing revenue stream to support your professional and personal needs? If not, can you qualify for traditional loans from lenders, use savings or credit cards, or rely on investors to help you get to where you need to be?
Benetrends offers a great solution for those looking to finance an existing business. We have pioneered a unique strategy that leverages existing 401(k) or IRA funds to finance a business acquisition and operating expenses, without taxes and penalties. To learn more about how Benetrends can help provide you with the necessary funds for your business purchase, schedule a consultation today.