Starting a business isn't the only way to have your own business. This is why so many people choose to buy existing businesses. In fact, almost 7,000 businesses sold last year.
Prospective buyers should consider several factors before making a purchase. You may be wondering, “What should I look for when buying a small business?” and other questions. Luckily, the Arkansas Small Business and Technology Development Center (ASBTDC) has the answers. Let's run through how to prepare to buy a business.
Benefits of Buying a Business
Starting a business can be challenging, whether you have the money and expertise or not. There is an alternative: purchasing an existing business. Before making your choice, here are some important things to know about buying a small business.
Buying a Business Is Less Risky Than Starting One
There is always a risk when getting into the business world. However, doing what you can to limit that risk is what matters. At ASBTDC, we have the resources available to help you consider every step of the journey.
Buying an established business that has already experienced some level of success makes the venture much less risky than building one from the ground up. When you take this route, you can secure a source of income with less time and effort.
When you buy a business, you'll likely have everything you need to continue its operation. This includes customers, employees, office space, and all the equipment.
When you start a business from scratch, you have the uphill battle of building a customer base, securing your inventory, hiring and training employees, and so much more.
You Could Have Less Trouble Securing Funding
If you start a business, your options for funding can be limited. You'll have to either pay out-of-pocket, secure loans, get investments, or obtain some combination of the three. Traditionally, lenders are more hesitant to fund startups.
In an existing business where there's already a consistent flow of revenue, you'll be able to tweak or manipulate a budget rather than prepare one from scratch. This makes setting the marketing budget, employee salaries, and other figures easier, and funding partners can see the business trade record, increasing the likelihood of securing financing.
Buying A Business Tips
If you think this choice is the right investment for you, then let's jump right into the due diligence checklist for buying a business. Here is what you want to look for before signing any papers.
Industry
Are you looking to purchase a business in a specific industry? There are a number of reasons for choosing a specific industry, including your background.
If you have the right network of contacts or vendors, that may aid in your decision. ASBTDC assists many prospective business owners who are current or former employees of the business they seek to buy.
Budget
How much business can you buy? You need to find out how much you can afford with your cash-on-hand and loan capacity.
You may want to get pre-approved for a loan to find out your maximum buying power. Then, you can determine how much you would be willing to take out to purchase the right business. ASBTDC can help you understand the financial resources needed.
On top of figuring out your own budget, you'll also want to crunch the numbers on the profitability of the business to make sure that you will get the right return on investment (ROI). Quality financial analysis is your best way to tell.
Find the Right Business
Once you've figured out your industry and buying power, do your research to find the right business fit. Ideally, you want the business to have consistent revenue, have been operating for at least five years (preferably 10), and be available at the right price.
There's a lot you can find out before even contacting a business owner. You can look on local directories and review websites to see how customers react. If the place has been in business for a long time and most of the complaints are about management, that's something you will be able to control. This also gives you insights into what you will need to do as a new business owner.
From there, check out resources such as the local Chamber of Commerce, as well as the Better Business Bureau to do more in-depth research on the company.
You want to investigate all aspects of the business you are considering purchasing. Refer to our Business Buyers Checklist for guidance.
Determine Why the Owner Is Selling
Find out why the owner is selling the business in the first place. If the business is for sale due to a lack of revenue, and you don't have a concrete plan to address that issue, then that's a problem.
If the owner has health issues, is retiring, or is moving onto another project within the field, these are the ideal reasons.
Look For Red Flags
Watch for any negative signs in the pre-vetting stage. However, before making any decisions, request documents to look for any final red flags.
Ask for balance sheets and income statements for the last three years, along with federal tax returns. Also analyze the roles and salaries of employees and obtain pricing and inventory information.
If the company doesn't have many repeat customers or "regulars," that could be a red flag. Look at why the owner is selling, how many hours they are putting in every week, customer satisfaction, and more. To get a good sense of how the business is performing, talk to the sellers and to the employees of the company.
Ready to Buy Someone’s Business?
Now that you know key aspects of buying a business, you can decide if business acquisition is the best path for you. Buying an established company can be safer than starting one yourself, with careful evaluation. ASBTDC is here to help you through each step of a business purchase. Contact us today with any questions! Call 501-916-3700 or our toll-free number 1-800-862-2040.