Buying an existing business is not a straightforward process, and there’s a lot of information you need to evaluate before making this decision. We want to make sure you’re confident in your choice, so this article will explain what information you should analyze once you’ve found a business you’re interested in buying.
We’ll cover the following factors you need to assess before you sign your acquisition agreements:
- The reason the business is being sold
- Financial documents and vendor relationships
- How the business operates
- Macro and microenvironment risks
- Tax and legal considerations
- Competitor analysis
- Licenses and permits
- Employee perceptions and company culture
- Keeping up to date with sector trends and changes
Before we begin the article, let’s take a quick look at the advantages and disadvantages of buying an existing business.
Is Buying an Established Business The Right Move?
Although buying an existing business has many advantages, you should also be aware of the risks that come with this business venture.
- Existing customer base
- Established cash flow
- Brand recognition
- Faster ROI
- Hidden liabilities
- Staffing challenges
- Outdated operations
- High purchase cost (you can read our business financing guide as a solution to this).
We know that buying an established business is a big decision. Spending thousands of dollars on a business that doesn’t meet most of your expectations will be very disappointing, and we want to make sure that doesn’t happen. Let’s take a look at the details you’ll need to investigate during your due diligence phase.
Ten Crucial Factors to Look at When Buying a Business
Gathering answers and insights into these factors will be a time-consuming endeavor, so it's important to allocate sufficient time to comprehensively address them:
Reasons for the Sale
- Why is the business owner selling their business?
- Be vigilant for potential underlying issues.
- Assess the business's market position and future prospects.
Financial Health and Vendor Relationships
- Scrutinize profit and loss statements for profitability or loss trends.
- Examine the balance sheet to understand the business’s financial health.
- Do the cash flow statements reflect liquidity?
- Analyze debt ratios, equity positions, and sales trends.
- Evaluate supplier relationships for reliability.
How Does the Business Operate?
- Does the business model seem sustainable and scalable?
- Examine the business’s products and services, along with market demand.
- Assess the uniqueness of the selling proposition compared to competitors.
- Understand the business's standing compared to competitors.
Macro and Microenvironment Risks
- Consider macro and microeconomic risks within the business sector.
- These risks include supply chain disruptions, technological advancements, regulatory changes, and employee satisfaction and retention strategies.
- Although no business is immune to failure, it’s worth investigating businesses with low failure rates.
Tax and Legal Implications
- Understand the tax implications of acquiring the business. Always make sure you’re aware of potential tax liabilities.
- We encourage you to seek guidance from tax experts on complex tax matters, particularly related to different deal options (like seller financing).
Tangible and Intangible Assets
- Take inventory of all business assets, which include physical, intellectual, and digital assets.
- Consider existing contracts, client relationships, and employee skill sets.
- Review licenses, permits, and their impact on market value.
- Analyze the competitive environment, focusing on opportunities and potential threats.
- Assess market trends that could reshape the competitive landscape.
- Investigate successful strategies employed by competitors.
Verification of Licenses and Permits
- Ensure the business possesses all required licenses and permits.
- Verify the authenticity of these documents.
- Check for any pending or ongoing legal disputes related to licenses.
- Understand license renewal processes and associated costs.
Staying Informed on Market Trends
- Maintain a research-oriented mindset to stay updated on industry growth, market trends, and competitive dynamics.
- Utilize data-driven insights for informed decision-making and adaptability to market changes.
Employee and Corporate Culture
- Assess employee satisfaction and retention rates.
- Understand the corporate culture and its alignment with your vision as the new owner.
- Examine leadership and management styles.
- Evaluate training and development programs, communication channels, employee benefits, and feedback mechanisms
Throughout these ten steps, your goal is to gather comprehensive information about the business you’re interested in. This will help you make an informed and confident decision while staying alert to potential pitfalls and untapped opportunities.
Warning Signs When Buying an Existing Business
Sometimes, a business for sale may overestimate its success and value. That’s why it’s crucial to look out for the following warning signs when buying an existing business:
1. Incomplete Information:
- Missing financial records and unclear business operations could highlight hidden issues.
- If you don’t have access to all necessary documents, a business owner could be hiding something.
2. Loss of Interest:
- Sometimes, business owners lose interest. This can negatively impact a business’s performance.
- Signs to look out for include negligence, reduced marketing efforts, an unmotivated team, or declining quality of the product/service.
3. Bad Customer Reviews:
- Consistent negative customer feedback reflects a deeper issue that you might take responsibility for.
- It’s essential to investigate the root cause of this, and assess whether you can improve the business’s reputation.
4. Unpaid Tax and Employees:
- Unpaid taxes or unsettled employee wages is an enormous red flag that could lead to legal disputes.
- During the due diligence phase, address these issues immediately so you can navigate them effectively.
Finding The Right Business to Buy
This article has shown that buying an existing business requires a lot of hard work. But carefully examining every aspect of the business will aid you with information and perspectives you need to make an educated choice.
When you’re ready to buy an existing business, you can explore thousands of valuable businesses for sale on our platform. We’re here to help you find an ideal opportunity, but we also want you to feel confident in your choice. If you need a deeper understanding of what it takes to buy a business, you can read our helpful and credible resources on buying a business.
We hope these insights have been helpful, and we wish you the best of luck as you embark on your entrepreneurial journey.