Whether you plan to purchase a franchise license or take over an existing company, buying a small business requires planning. There's a lot to consider beyond the type of business and how well someone else is running it now. Here are six things to keep in mind as you start the process of buying a small business.
1. Business Valuation
You may not want to take the current business owner's word when it comes to the valuation of a potential small business. Consider getting it valued yourself. An independent business valuations company can research the value in greater detail, and may be able to help provide more insight into how much the current owner's expertise contributes to the company's overall worth. Specialized accountants may also be able to help evaluate the company's financial records to help ensure they are accurate.
Location can be important. If you're considering buying a business that has walk-in customers, you'll want a location your customers will like. A retail store selling products or services may rely on walk-in traffic, access to public transportation or parking, or a safe neighborhood. Another reason may be that you'll want a location that's convenient for you and your employees to get to. As a small business owner, you will likely be intimately involved in running the business, so you may want to consider what your commute to the location would be like.
Your business may provide you with a good income, but you may not want to overlook your personal lifestyle. A store that's open seven days a week likely won't leave you much downtime to handle the administrative side of running the business if you're on location full time. Is the business one where you'll be able to step away occasionally, whether for a family function, vacation or even just a day off? Will you be on call frequently to handle emergencies? Is there a lot of travel involved with the business? Consider how important your lifestyle is to you as you weigh your options when buying a small business.
On top of your personal living expenses, how much money do you need to buy a small business and run it? Businesses, even established ones, may not break even right away, and there may be a transition period while you get acclimated. Before buying an existing small business, consider performing a cash flow analysis to help you determine a break even point. If you're not sure how to do this, you can hire an expert to help. Then you'll likely have a better idea of how long you need funding to last, whether it's through a bank loan, personal funding or other means.
5. Business Size & Employees
If this is your first business, are you comfortable with its size? Will the current employees stay with the business? A transition can be easier if the company already has loyal employees with expertise and experience. Knowing the customers and routines means you may have an easier transition. However, if you're starting a new franchise location, hiring employees and building up the business yourself, that may require greater investments of both time and money.
Before you purchase the business, it may be worth finding out whether the current owner plans to work in a similar field. If so, you may want to consider this when drafting the purchase agreement and employee contracts.
6. Hiring the Right Help
Getting the right advice before you open your doors or even agree to purchase a small business is imperative. Your experts will likely include the following:
- Tax advisor: There are several tax implications to small business ownership, whether you're buying a business or starting your own. Consider consulting with a tax advisor before agreeing to any purchase, and while setting it up. The advisor may be able to investigate whether all applicable taxes were paid to the appropriate tax authorities by the seller.
- Attorney: An attorney can review any business agreements to help you determine the proper way to structure a purchase, which may help protect your legal and financial interests. An attorney can also help you work out the best business incorporation strategy, make sure your employment approach is proper, and spell out what should happen for a smooth purchase closing process and transition.
- Financial representative: It's important to consider covering your potential liabilities, and a financial representative can help give you the information you need to decide what coverage you may need. This may include key person insurance, which can provide income if something happens to you or another essential employee and business operations are interrupted, general liability insurance, or disability and accidental death insurance.
It's exciting to think of buying a small business, but do your homework first. By thinking about these considerations ahead of your purchase, you might be able to help reduce your stress level and give yourself the best chance for success as a small business owner.
Small Business Solutions