Purchasing an established company has many advantages. It’s a less risky option if it’s the first time you are venturing into business on your own. However, a rash decision may result in remorse. There is a lot to cover before committing to a deal, and not skipping any step of the process is the only way to ensure business success. The first thing to consider is your own expertise in the business, and how passionate you are about it. Even the most successful company is not a good choice if these two factors are missing. But, if you already found your dream venture, what else should you consider?
Why is the owner selling?
While it may not be easy to get a potential seller to disclose their true reason for selling (especially when they are problematic), a thorough conversation with the current owner is always a good idea. The obvious first question is why are you selling? but there are other ways to get valuable information:
- Ask for details about the operation
- Inquiries about the relationship with creditors are to be posed carefully, but even reactions to the question should be taken into account
- Ask if it is possible to have an interview with current employees and suppliers. Their opinions and reactions are always important.
Financial and Legal Background Check
While it is not true that companies are only sold because of financial issues, it is always important to understand the financial situation of the business. A good place to start is to run a background check. With a background check, not only on the business but the previous owner, you will access very valuable information, such as debt, credit status and lawsuits. Due diligence should never be overlooked. While the financial status may seem fine on a first look, there may be commercial credit risk or other associated issues. There are several agencies that conduct thorough background checks. Usually, a seller is willing to agree to them. Keep in mind that you always need to use a regulated Credit Rating Agency to avoid legal liabilities.
On the legal side, you will want to have a lawyer to assess the status of all contracts, from employees to clients. Inherited legal liabilities are one of the biggest pain points of new business owners.
Other Legal Considerations
A background check will offer valuable information, but there are more legal issues to consider:
- If the business has any patents or intellectual property, will they be transferred with the ownership of the business?
- Zoning industry regulations that affect the business are of the utmost importance. Research about possible changes that may be pushing the owner to sell
- Always ask to see at least three years of tax returns. This will give you a clear view of the true financial status of the company. If tax have not been filed properly, you may find yourself with a big problem in your hands.
- Always ask for a non-compete agreement from the current owner, that lasts at least five years.
Operation Costs and Assets
The cost of operation is an important aspect that is sometimes overlooked. Understand how much will you have to invest to maintain operations at their current level. If you have enough money to purchase the company, but you are not able to keep up with the first months’ overhead costs, it’s not a good idea to follow through.
Asset evaluation is also recommended. Find out how much has been invested in assets, and their condition. Will you need a big investment in improvements and maintenance? Are you financially ready to cover it?
Understanding company culture is always crucial. For example, a company with a high employee turnover may have deeper underlying issues related to company culture. While this is something that can be changed, having loyal staff is always an important asset. Planning employee transition carefully is a cornerstone of success.
One you have the operation and employee transition covered, understanding the market is the next step. In-depth research about market size and behavior (growing or shrinking) is essential. Learn about your main competitors, trends and growth prospects before making your final decision.