When you want to start your own business, you should consider buying an existing one. Still, the process can be more difficult than expected if you don`t know enough information about how to buy a small business and make it a success.
Research
The first thing to do is identify the reasons you want to buy a business. Take into consideration your background and experience, and whether you are interested in a particular product or service. There are many websites specialized in listing interesting small businesses, so you should go online and find the ones that might be right for you.
Financial Review
Make a detailed financial review of the business, including past income statements, balance sheets, cash flow reports, and projected financials. Identify all weak points, because when you buy a small business, you also inherit its debt. You can get a Dun & Bradstreet credit report on the company in order to see its track record and to confirm its reported numbers. Don`t hesitate to analyze all these with a specialized accountant.
Due Diligence Package
A due diligence package includes past tax returns, significant contracts signed by the company, as well as any employee or contractor agreements. This documentation should also include legal papers such as filings, articles of incorporation, and past/pending lawsuits involving the small business. Check these and other documents with a lawyer.
Possible Problems
It is also important to know why the company is for sale. Sometimes, an apparent great deal can become a headache if you don`t correctly identify its flaws before purchasing the company.
Observation
If you want to buy a pub, for example, observe the customer traffic for a week to verify if the revenue matches the one the current owner claims it does. Chat with the customers to find out their sincere opinion about the product or services.
Business Plan
You need to make a detailed business plan if you want to raise capital. Establish how much you can afford to invest, then look for funding. An MBA, with a concentration in enterprise risk management, is a great foundation for determining the risks worth taking when buying a small business.
Valuation
Determine the right valuation for the small business. There are standard methods for that. For instance, if the company has a lot of equipments, consider the market value of the equipment. Valuation will help you justify the purchase price to yourself. Carefully calculate if this business meets your needs.
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