Many people who choose to go into business often look for existing businesses that are for sale. Such people have different reasons for choosing this option instead of starting from scratch.
One of the greatest advantages of buying an existing business is that it already has an established customer base. Another advantage is that an existing business that is successful probably has a good reputation.
However, there could be many disadvantages of buying existing businesses. A potential buyer of an existing business should know the right questions to ask to avoid problems.
Typical Questions to Ask
- Find out the asking price of the business.
- Potential business owners should know the amount quote and how the asking price was determined.
- The value of a business is based on the products and services it deals with and its cash flows.
- Find out if the business building is locked in as part of the sale. Some business owners may not include the price of the business building in the quote.
- If the building price is included, it is upon the buyer to decide if there is need for further negotiation.
- Prospective buyers who want to buy a business and its building should be certain that the building’s value is equal to or exceeds the quoted price. This may involve investing in certain building inspections including termite, heating/air conditioning, plumbing, electrical and safety inspections.
- In many cases, sellers can negotiate to split the inspection costs with the buyer.
- If the building requires upgrades or changes because of the inspections, the potential buyer can exploit this to negotiate further.
Equipment
- Obtain a list of equipment that is being sold along with the business. Find out the age of the equipment and current market value. Some equipment becomes outdated after a short time. This means the new business owner may have to upgrade or replace the outdated equipment. This can also be another sticking point if the current business owner is asking for more than the business’ worth.
- Get a detailed list of all inventories, supplies and materials that are being sold along with their age and value. These items can be used as collateral when seeking a loan for the business.
- Outdated supplies or inventory present an extra cost to the new buyer.
- Obtain a list of current business vendors from the business owner.
- Take notes of the vendors’ credit lines, turnaround times and any other issues that may affect the business.
- Find out if the credit lines will apply to a new business owner or if the owner can negotiate new ones.
- Look for new vendors if the current ones have a slow turnaround or if they have other problems.
- Get a list of trademarks, patents or copyrights and determine the status of each.
The list should be as comprehensive as possible.
Look for Possible Problems
- Examine the financial records of the business including cash flows and profit and loss statements.
- Determine the amount of money that goes in and out of the business each month and find out how that affects cash flows.
- Determine if there are months when cash flows are higher or lower and if the amount coming in is enough to see the business through the low times.
- Review the business’ accounts receivables to see which customers pay in time, those who are slow and those whom the business needs to delete altogether.
- There is no need to have a long list of customers if they do not pay on time or do not pay at all.
- Find out if the business owes back taxes.
- Keep an eye out for other potential problems and see if they can be solved.
Buying an existing business offers the opportunity to use the brand name of an established firm as well as inherit the reputation of the business.
However, it can also be costly and mired with problems. Potential business owners should do their homework before buying a business.
Buying a business without asking these questions is dangerous. Once the business changes hands, all its problems are transferred to the new business owner.
If you are interested in buying an existing business, please search our online business business for sale listings.