Here’s what you need to know before buying a business:
Rather than building a small business from the ground up, buying an existing company offers the opportunity to move along the path to entrepreneurship more quickly. With all of the startup tasks already taken care of, a staff in place, an established customer base, existing vendor relationships, and processes and procedures laid out, you have a head start.
But that doesn’t diminish the importance of doing your research before making the decision to buy a business.
Acquiring an existing small business requires substantial examination so you avoid the many pitfalls that befall eager entrepreneurs who leap before they look.
According to Marty Cohen, a SCORE Mentor at the St. Augustine Branch, “Investing in a business is the same as investing your savings in a mutual fund or stock portfolio to secure both your future and possibly your retirement. You study and review the past performance and the current condition and seek help and advice from professionals on the prospects for the future.”
Before purchasing an existing business, you need to get answers to some critical questions:
Why is the current owner selling the business? Seek the truth. If the business is in a declining neighborhood or the owner has caught wind of an upcoming market change that will negatively affect revenues or cost structure, you might put yourself at risk of failure from circumstances beyond your control. Uncovering the real reasons for a sale may be difficult.
Be wary and realize that smart business owners don’t often walk away from profitable endeavors unless they have strong personal reasons (illness, retirement, etc.), or they have received offers that are too good to refuse.
How is the business doing financially? If it has been losing money or hasn’t been generating a satisfactory profit, you’ll want to dig deeper into the reasons why. Unless you’re confident you can operate it more profitably than the current owner, you might end up with a sinking ship on your hands.
What sort of reputation does the business have? When you buy an existing business, you’re getting the brand reputation along with it. That will either work for or against you. Turning around an existing business’s poor reputation will be difficult and could take years — and it might even be impossible depending on how negatively the company is perceived by customers, suppliers and the public.
If the business has a favorable reputation, find out what has made it so. A strong reputation based on personal relationships between the owner and customers might not easily transfer to you. Be particularly cautious of this if the business relies primarily on a few key customers or suppliers.
Are you getting everything you need to seamlessly take over running the business? Find out if the purchase will include essentials such as: leases and contracts, customer lists, patents, trademarks, service marks, and trade names; key employees who are vital to the business; and other important components.
As Cohen suggests, you don’t have to embark on the process alone. Consider tapping the expertise of professionals (such as SCORE mentors) who can help you assess the opportunities and risks of buying an existing business.
Marty Cohen has been a SCORE mentor for more than 10 years. His career was with Union Carbide for 32 years as Worldwide Business Director with experience in manufacturing, distribution, marketing and strategic planning. He is a longtime resident of St. Augustine.
Since 1964, SCORE “Mentors to America’s Small Business” has helped more than 10 million aspiring entrepreneurs and small business owners through mentoring and business workshops.
SCORE, a resource partner of the Small Business Administration, is an all-volunteer association dedicated to entrepreneur education and the formation, growth and success of small businesses.
There is no charge for SCORE mentoring and all sessions are confidential. For more information about starting or operating a small business and setting up a mentoring session visit SCORE at www.score.org or call the St. Johns County Chamber of Commerce at 829-5681 and ask for Jordanna.