Questions to Ask Before Buying a Business
A Two-Step Process for Considering a Business to Buy
Buying a business is basically a two-step process. First, you must decide if buying this particular business is a good decision, then you must go through the buying process. At any point in this sequence, you may decide to back out. Let's get started.
Step One: Should I Buy this Business?
1. Why am I buying instead of starting my own?
There are lots of reasons why you might want to buy a business rather than starting your own.
If you want a franchise, for example, or a business that is exactly what you need, you can save much time and money buying. If, on the other hand, this business isn't a good fit for what you want, you might be better off starting your own.
2. Is this business in the right location?
As in real estate, location is everything and you should select your location before you begin looking for businesses. Location is more a personal decision than a business one and finding the best place to live and work is important. if a great business is in a location where you and your family won't be happy (climate, schools, recreation, near relatives) then it's not the right business. Keep looking.
3. Can I make a living from this business?
The time to do these calculations is before you start negotiating, and you will need to keep asking yourself this question all the way through the process, as things change.
If you can't make a living from this business, considering price, income, overhead, and financing, then you may have to walk away from the deal. First, decide what you need to live on. Then start looking at the business closely to make sure there is a verifiable income that can support you and your family.
At this point, if you are satisfied that this is the right business, in the right location, and that you can make a living running this business, you're ready to proceed to the next step. This process is called due diligence, as you are making diligent efforts to make sure everything about the business is what you want, so there are no surprises. The due diligence process is complex and detailed, and it should not be rushed. Read more about the due diligence process and what it includes.
Step Two: Negotiations and Details
4. What business advisors do I need?
The circumstances will determine whether you need a broker to help you find and evaluate and purchase a business. Read more about what a business broker can do for you. Remember that in most cases, the broker is working for the seller, to get the highest price possible (and the highest commission for the broker), but a good broker can be a great asset to you during the buying process.
You will also probably need two other business advisors during the buying process: (1) the services of a CPA or financial advisor who can evaluate the financial position of the business and (2) an attorney who can help construct the details of contracts and other legal documents.
5. What am I buying?
This sounds like a strange question, but there are several possibilities for purchasing a business:
- You can buy just the business assets, including land and building (if owned), furniture and fixtures, equipment, leasehold improvements, inventory/work-in-process, parts, the business name, patents, trademarks/service marks, and possibly copyrights. Depending on the type of business, the assets may also include a list of returning customers or customer information.
- You may also buy the business as an entity, including liabilities, like payroll tax liabilities, loans payable, taxes payable, mortgages payable, liens, and unpaid debts and pending judgments.
- If the business is a corporation, you may be buying up all or some of the stock from the previous owners.
Buying a business depends on business type
If you are buying a sole proprietorship, LLC, or partnership, you are probably buying only the business assets, not the liabilities, and there is no stock to be purchased.
If the debts of the business are not paid for out of the proceeds of the sale, they remain the legal responsibility of the previous owner. For example, as noted by INC., the IRS doesn't release business owners from tax liabilities (either income taxes or payroll taxes) when a business is sold. They remain as personal liabilities.
Other liabilities, such as bank loans and mortgages, may need to be personally guaranteed by the previous owner(s). All liens and other outstanding legal obligations should be specifically dealt with so that the new owners do not assume liability. For example, if the business is involved in a court case, there should be a specific exemption of the new owner(s) from liability for costs associated with the case or from any repercussions from the decision.
6. Am I paying too much? What is the value of the business?
One of the first steps in the due diligence process is a valuation of the business, done by a qualified business appraiser. The asking price by the seller must be considered in comparison with the valuation. Sellers often have a lot of emotional equity built into the business, and if the seller wants too much, and the valuation won't support it, you might have to walk away from the deal.
7. Can the business be financed?
At the same time, as you are doing your due diligence and evaluating the worth of the business, you'll need to be considering and discussing financing. One of the possibilities is an earn-out, where you pay back a loan from the seller over time, with the profits of the business. Traditional bank financing, trade credit, and other financing may be combined. If you can't find financing, this becomes a no-sale possibility.
After all of this time and effort, it may just be possible that you have bought a business. If so, congratulations!