5 Key Questions to Ask Before Buying an Existing Business
Buying an existing business can be a great way to expand your holdings and increase your revenue. It can also be a money pit waiting to happen. Before moving forward with the acquisition of a business, you should ask yourself and the seller these five key questions in order to minimize the risks involved in the transaction.
1)Why are they selling?
This is perhaps the single most important question to ask yourself before signing on the dotted line. The motivation behind the sale could be very telling about the business’s future prospects. If the owner is selling because he or she is looking to retire, then that might be okay. Conversely, a sale due to pending legislation that could impact the business or some other negative factor probably doesn’t bode well. This type of sale might mean that the owner is looking to get out before the price plummets.
2) How did the owner arrive at the asking price?
The price is another tell-tale sign of whether the sale would be a good investment. If the price seems too good to be true, it probably is. Inquire into the reason behind the price and the methods used to reach the valuation.
3) Will there be problems if a new owner takes over?
Ownership transitions can have an especially large impact on a small business. Large businesses with more established consumer bases and systematic practices are oftentimes better able to adjust to changes in leadership, but a small business may have a much more difficult time adapting to the changes. In some circumstances, you may be able to request that the previous owner assist with the transition, but other times this may not be possible. Be sure you are well-aware of the implications your takeover of the company will have on its ability to conduct business as usual.
4) Is the market overexposed with the type of business?
Buying businesses in your industry to avoid extra competition can be a extremely beneficial decision. If you are looking into a new venture, you might want to consider the market. Whether the business is physical or online, competition could erode the profitability and success of a business. For instance, taking over a pizza place in a sea of pizza shops may not be wise. Conversely, taking over the only Mexican restaurant in a sea of pizza places may be a better option. Be sure to consider the implications of both the company’s existing market, and any new potential markets.
5) Will there be any other downsides to the purchase?
In order to buy the new business and make it profitable, you may have to put in more effort than you expect—not every existing business will be a perfect turn-key operation. For instance, properties are often grandfathered in following new zoning ordinances. When businesses change owners, that privilege may disappear. In order to open, you might have to put a lot of money into the business for it to be up to code. Make sure there are no outstanding ordinances or regulations that would eat into profits and make the purchase less desirable than it may have seemed at first.
Purchasing an existing business can be an incredibly complex process and it is vital that you utilize a skilled business attorney to assist with negotiations and ensuring that all aspects of the purchase are in full compliance with all relevant statutes and regulations. If you are considering buying a company, please do not hesitate the contact The Campbell Law Group today and let us guide you every step of the way.