Buying a business can take time and energy. It is important that you do your research to ensure that you buy the right type of business and that you pay a fair price for it.
Evaluating a business
Before deciding to buy a business, you should evaluate the condition and potential of the business. You will need to consider:
- Are the building, equipment and inventory operational?
- Does the business have a good reputation?
- How visible and easily accessible is the business? Is it located in the city or out of town? You will have to take into account shipping costs that will be necessary if you are distant from your suppliers and customers.
- Are the products or services generating revenue? Are sales increasing, decreasing or are they flat?
- Is there a good working relationship with the suppliers and the bank that the business deals with?
If a deal seems too good to be true, it probably is. So, beware!
Determining how much to pay for the business
As a buyer, know what you can honestly afford before negotiations start. You should be flexible in your negotiations, but keep within your budget and know the value of the business being sold.
What is the value of the business?
- The value of the assets, such as the building, equipment and inventory.
- Factors such as the business's financial statements, annual report and intellectual property (for example, patents and trademarks).
- Other valuable assets are reputation, customer lists and the quality of the personnel.
Talk to clients who buy directly from the business. It is better to find out the reputation of a business before you sign the contract. Banks are more receptive to a business that has already been profitable.
Final considerations
- Take your time and verify all the information you are given before you commit to buying.
- Buy a business within an industry you know well and with products and services you are comfortable selling.
- Buy based on the return on investment and not the selling price.
- Do not use all your cash for the purchase.
- Investigate existing suppliers and clients, as well as the reputation of the business before you buy.