You don’t always need a new idea to make a vision come to life. If you’ve decided to buy an existing business in 2021, you get to skip over the startup steps and jump right into owning a fully functioning company.
While purchasing a company lets you skip ahead and bypass much of the heavy lifting, there are still many important factors and decisions that go into the actual purchasing of an existing business.
AA Tax & Accounting Services has compiled a list of 5 things that new business owners need to know when buying a business. Following these tips will help streamline the process and minimize pain points along the way.
1. Determine why the business is on the market
Purchasing a business is one of the largest investments you can make. You don’t want to put your hard-earned money into a company that has significant operational issues or is doomed to go under in the next few months.
That’s why you need to find out why the business was put up for sale. It could be something as simple as the current owner wanting to retire. But if it’s something about the health of the business, you want to be aware of potential issues before getting into the business. Red flags can range from debt and inventory issues to outdated equipment and a bad reputation in the community.
To fully grasp the health of the business and uncover if there are any shady reasons why the business was put on the market, you need to engage with the current business owner. Ask them questions about how the business is performing, how the team operates, what challenges they’ve faced up to this point, and where they see the future of the business going.
Getting a comprehensive look at the business from the current owner’s perspective will allow you to grasp why they’re selling, what has worked for the business historically, what improvements need to be made, and what you can expect moving forward. Your conversation may uncover obstacles that are a dealbreaker for you that you wouldn’t have otherwise known about.
Keep in mind that the current owner may show some bias towards their business. To truly get a well-rounded idea of the health of the business, you should engage with employees, competitors, customers, and the local community to make sure that the business is well-respected and one that you want to have a stake in.
2. Research the industry and market history
Purchasing a company is a considerable investment. You don’t want to put all your eggs in one basket, only to have the bottom of the basket fall out from underneath. To ensure you’re making the right type of investment for yourself financially, you need to analyze the industry and the market history.
If the market has been stagnant for the past few years, it might not be the right opportunity for you. However, if you see that the market is growing rapidly, it might be the right time to buy. Understanding the industry and marketing will help you determine the future profit potential of the business.
3. Understand how much time will be required
When you purchase a business, you aren’t only investing your money. You are investing yourself and your time as well. You need to determine if the investment is worth the time and effort that you’ll need to put into it as you get it off the ground. Is there somewhere else you can reap more rewards by spending your time differently?
If you are buying a business similar to another you own, you’ll be able to pick it right up. However, if you are buying a company outside of your comfort zone in an industry you haven’t dabbled in before, it’s going to take more time to learn the nuances of the business and the market. Depending on your goals as an entrepreneur, you need to know how much time will be required of you so you can determine if that is the time best spent.
4. Gather company information
When purchasing a company, you’re going to go through a lot of paperwork. You need to read through all of the gathered materials so you have a complete understanding of the history of the business and go into the sale with open eyes. Make sure you receive and read through the following materials:
Business licenses and permits – Do your research to understand what licenses and permits are required to operate this type of business. Does the company currently have all the necessary licenses required of it? If not, this is a major red flag.
Organizational paperwork – At the company’s inception, it would have been registered with the state in which it resides. Review this organizational paperwork to evaluate if the business has a certificate of good standing with the state.
Business financials – You’re likely investing in the business because you see it as an excellent financial investment moving forward. Review all the financial records, including tax returns, balance sheets, accounts payable, and debt disclosures, so you know exactly what you’re walking into.
As the new person in the business, there is no way for you to know everything, but you can do your due diligence to better understand everything going on behind the scenes.
How to secure the necessary funding
Once you’ve decided that the business is an investment you’d like to make, you need to know how to secure the necessary funding to purchase the business.
Depending on your current financial state, there are a few different options that may appeal to you:
- Seller financing – Depending on the nature of the sale, the seller might provide you with the option to make monthly payments directly to them over a specified period.
- Business loan – The most common way to purchase a business is with a business loan. To do this, you will go through an approval process and need to qualify.
- Venture capital – If you don’t have the capital to purchase the business, you may rely on an investor to purchase the financial backer. Although they would own the business, you would be the one managing day-to-day operations.
Weighing the pros and cons of each financing option will allow you to make the best choice for you.
Tax consulting services in Cedar City, Utah
The AA Tax & Accounting Services team is committed to helping you feel confident with all your financial decisions. Contact us to schedule an appointment.