How To Buy a Small Business

Has the entrepreneurship bug bitten you? You can either buy a business or start one. Let's look at the first option - buying a business.

It sounds very easy, just like buying a product off the shelf. ‘Oh, is that business within my budget? Sounds good, looks good. Let's go ahead with the purchase.'

Well, it is not that simple. It cannot be, what with the investment and long-term commitment you have to make.

This is how to go about buying a business.

  • State in black and white your reasons for getting into the business - what do you want to experience and what is your goal? Do you expect it to give you more freedom or better pecuniary benefits? Will the business you want to buy give you this experience and help you achieve this goal?
  • Put down on paper the responsibilities involved in running the business. Start with what happens when you take over, the one-time repairs, consolidation and training; the regular mundane activities of keeping the business going, such as the administrative paperwork, interaction with the vendors/business partners/customers etc, getting a good team, managing that team on pay, supervision, morale and motivation, and much more. Is this your cup of tea?
  • Complete due diligenc
    • Why is the business up for sale? Is the factor independent of the business or related to the business? Can it affect you also in a negative manner? Are there any hidden liabilities?
    • Get a professional accountant to look into the books and check on the financial health, the customer base, the inventory turnover, the receivables and its behavior etc.
    • Get a professional from the industry (relevant to the business) and get that person to do a detailed assessment of the business, the way it's been run, any problems they see or expect to see, any extra effort they see as being needed in an area and so forth.
    • Let the experts also check and confirm that all regulatory requirements have been met and there are licenses and certificates as required by the local government.
    • Let the experts look into the current market held, the financial ratios and the growth potential with requisite investments, if any.
    • Get the experts into a discussion and sit together to set a value to the business.
  • Understand the business by being present every day for a period so that you understand and experience first-hand what it takes to run the business - the blood, the sweat and the tears, and not just the smiles.
  • Get references and opinions.
  • Speak to current customers, clients, vendors, suppliers and business partners. Hear their side of the story.
  • Speak to the local business associations or chamber of commerce. They will have valuable insights to give on the business.
  • Once bought, what will be the involvement or obligations of the current owner? Check whether you need and they will provide handholding and training of yourself and any staff that you acquire till a particular period.
  • Availability of the current owner for any particular and special issue that may arise.
  • Whether any legal liabilities of the past or the period when you were not running or owning the business will devolve on you.

Do not discuss terms with either the seller or the broker until your experts have assessed the business and its books, and fixed a value. The basic principle is that no detail is beyond your evaluation and notice, so get into the due diligence and don't worry about getting your hands dirty. That way, the business you end up buying will be a safer bet.


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