Not every businessman starts his own business. Many buy up a running business. Most people think that this is an easy option because the ground work has been done and all that is required is to keep the business running. If you think this way, you may be making the biggest mistake of your life. There are always skeletons in the cupboard. You will not find a perfect business operation to buy. But knowing where the problems lie before you shell out your money can save you a lot of grief.
Why it is for sale? You know what the owner has told you (retirement, health, family etc.). But how true is this? Make your own discrete inquiries and try to find out if there are reasons that could affect the future of the business.
The next thing you need to do is check the balance sheet – not for the current year, but for the past several years. Obviously you will look at the profits. But keep an eye open for other things as well. Have there been a lot of ups and downs? If so why? Has the profit been steady with no real growth? This is not a good sign. Has all the profit come from operations or has some money come in from the sale of assets (even small things like computers and furniture)? Yes, obsolete equipment needs to be sold off, but is this the real reason? If the current year’s profits are exceptionally high, look carefully for the reasons. Could it be that the owner has artificially boosted the figures to make the purchase look sweeter to you? Understanding accounts is a fine art. If you are not competent to do this yourself, get professional help. It’s worth the cost.
Study the business and economic environment. Is the company dealing in products or services that are becoming outmoded? Or is there legislation on the anvil that will restrict the use of the product or service? If so, the business doesn’t have a future.
Check out the financial aspects that do not appear on the balance sheet. Get a copy of the owner’s credit rating. Is he in debt? Could it be that he has been using his personal funds to keep the business looking healthy? Check with the local Better Business Bureau to see what information they have on the business. Banks are notoriously reluctant to talk about their clients, but there is no harm in meeting the company’s banker and asking a few questions.
Meet the other stake holders – the web designer and hosting company, the computer maintenance people, the suppliers. They too may not be willing to say too much, but even from their attitude, you can learn a lot about how their relations with the company have been.
The employees will also not say much. But spending some time with them will tell you if the office atmosphere is positive or negative.
Buying a running business can be a good idea. Just be sure that if you are paying for an apple, you are not getting a lemon.