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How to buy an existing small business

Buying an existing business may be easier than starting from scratch and it may be ideal if you’re new to entrepreneurship. However, as with any business, running it is never easy. Being a small business owner comes with its own hurdles, whether you are starting from scratch or buying an already existing enterprise. To make sure that you don’t get yourself into unexpected problems, make sure you consider all options and research fully to make an educated decision.

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Your reasons for buying an existing business will vary, whether you want to be an owner and remain very much in the background or if you are going to be involved in the day to day operations. You will need to carry out due diligence and really get to know the business and staff, to get a realistic idea of what the business is like and how it operates. If you are thinking about buying a business, then here are some things you will need to consider and keep in mind.

Get to know the business

When you have decided on an industry and have selected either one or multiple options for your new business venture, you will need to get to know the business. You should take your time to get to the business inside and out, from the financial records to the way the business operates. When it comes to looking at the financial records, look at the previous years. Even if the previous financial records are promising, make sure you assess the business with regards to the current economy. The economy is always changing and what could be thriving yesterday may have a short life. Therefore, you don’t want invest in a business that may fail tomorrow due to the consumer demand.

You may need to sign a confidentiality agreement to get access to the finances and the records of the business. However, it is essential that you see the state of the business that you may end up owning.

You should also get to know the staff and the employees of the business, this will help you get an idea of the culture of the workplace. You should also invest time in getting to know the employees, because they will be helping you run the business. Additionally, getting to the employees will help you get an insight into the business, and help find out if there are any current problems or issues that the current owner may be hesitant to tell you about.

If you uncover issues, whether it takes a bit of work or the current owner is honest from the beginning, you will need to know whether you can take the challenge on. It doesn’t matter if the business has not been performing great in the previous months/years, the important part is knowing the reason why and having a solution. You need to be skilled in turning the business around, and making it a success.

Why is it being sold?

One of the main questions you need to ask is why the business is being sold, and this is perhaps the most difficult question to get an honest answer to. The answer may be simple, from the owner wanting to retire, to the business not performing well. However, you need to make sure you can uncover as much of the truth as possible in order to prepare you for being the owner of the business.

The current owners will skim past the parts of the business that won’t make it appealing to you, and as it’s obviously being sold for a reason it’s up to you dig the truth. You can get a good indication of the real reason from looking at the finances of the business, speaking to the employees, spending time with current owners as well as talking to people in the similar industry.

Value of the business

Once you have spent time getting to know the reason the business is being sold and how the business really operates, you will need to get into the value of it. When you first approach businesses, it might be a good idea to get an initial idea of the value and how much it is being sold for. This will save you from wasting time on getting to know a business that you cannot afford to buy.

When it comes to getting the true value of the business, you should seek professional help. The help you get can vary from business brokers to an accountant. Getting help is especially important if you have little experience in the small business sector.

When it comes to making an offer you should have an initial offer and then the maximum offer in mind. This will ensure you are more prepared for your initial offer being rejected. If a business is doing well and the owner is selling for personal reasons, then they may want a reasonable price. Whereas, a struggling business may be more inclined to sell for a cheaper price. Therefore, make sure to have a range of how much you want to offer.

Funding

You will also need to consider funding to buy your business, as well as any other additional funding that you may need. You have multiple funding options available when it comes to funding your small business, from peer to peer lending platforms, to government backed loans. Carrying out research will help ensure that you find the most suitable method of funding your small business.

What are the pros and cons?

Weighing the pros and cons of buying a business can help you make the decision and it can help you visualise the future, and to see if you are ready to take on the challenge. Here are some of the pros and cons of buying an existing business.

Pros:

  • The business is already up and running
  • There will be an existing customer base
  • The brand is developed
  • The business already has a way of operating – which you can either change, enhance or keep the same
  • You don’t have to start from scratch
  • More likely to get funding for a proven business
  • The current owners may be able to offer help and advice
  • The business should already have a reputation
  • Save on marketing costs that would come from starting a new business

Cons:

  • The existing reputation of the business may not be good
  • The customers may be unsatisfied
  • The business may be failing – and this could be because of multiple different reasons you will need to tackle
  • It will take time getting to know the business that you may want to buy
  • You may need to relocate

Investing in a business is a huge commitment and you should make sure that you have taken time to really get to know all aspects of the business. There are many benefits as well as pitfalls, but only you can make the decision of deciding your future.

More on starting up and growing a business.

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