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Buying a business can be a very attractive and rewarding experience. When you buy a business you already have a customer base and revenue stream. In fact it may not even be unreasonable to expect to get the keys on Friday and take home a paycheck the following week. You cannot get these benefits from starting a business from scratch. After all, you may not know when you will start to bring in revenue. However, careful research is critical before investing any amount in buying a business.

One of things you should find out is why the owner are selling. In addition, does the person have the authority to sell the business? Are there any silent partners? You don't want to find out at the last minute that everything hinges on a partner or boards approval.

If the person selling the business does have a partner, one good question may be "Why doesn't your partner want to buy you out of the business?".

Look for the "gold" in the business you're looking to purchase. If you are looking at a well established business with a long standing and loyal customer base, changing even the smallest aspects of the business could alienate your customer base. You could quickly find yourself out of business. Unfortunately the "gold" may also be the seller, in which case the "gold" goes out the door with the seller.

Examine the details of the business. After signing a confidentiality agreement you should be able to view the operating history of the business for at least the past three years.

Additional Considerations during the Research Process:

  • How was the selling price determined, and what assurances do you have that a positive growth and revenue trend will continue?
  • How much special or industry knowledge is necessary to run the business?
  • Are account receivables, or unpaid bills included in the sale? After the business purchase you don't want claims that the "old owner said I didn't have to pay for this."
  • Does the business have any debt? The business should be bought free and clear with no liens or liabilities.
  • What percentage of the business is related to warranties? As the new owner you are responsible for the service even if you were not the owner of the company when the product was sold.
  • Make sure you obtain a non-compete agreement prohibiting the seller from opening a competitive business within a reasonable geographic area.
  • Ask for seller financing. About 80% of business purchases involve seller financing. A typical arrangement may require the seller to put down 40% - 66% as a down payment and finance the remainder with the seller over a period of 5 years.

One thing to remember is that with the seller, everything is negotiable. It's not uncommon for the buyer to spread out payments for 5, 10 or 20 years. You will also need to keep the sellers needs in mind. For example, if the seller is a certain age, they may not want high payments made to them due to tax considerations.

Check out the competitors. Call one of the competitors sales people pretending to be a customer. Sales people like to talk, and you may be surprised what you can find out. Drive by the competitors to check out the traffic. If it's a construction firm you're interested in, you may want to visit in the morning to see how many crews go out to work.

Never take the owners word on the financial's. You need to have an accountant look at the books, and you should investigate on your own how much cash the business is really taking in. The seller should be able to prove the businesses income through tax returns, profit and loss statements, and expense reports. Make sure salaries of the owner and family members are figured into the businesses profit.

Make sure the owner is going to stay for a specified period to assist during the transition process. Do you want to keep key people? Check to make sure that they will stay after the business is sold.

After your research is complete and your account has reviewed the financial information, you may be ready to make an offer. Don't hesitate to ask questions or make offers. Your contract should state that the buyer can pull out of the deal up to the last day of due diligence.