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5 Crucial Things to Consider When Buying a Small Business

Martin Castilla            No comments            Sep, 27

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The online market is highly competitive and overcrowded. Many business owners simply cannot compete in such conditions and are forced to sell their company. However, with all the difficulties that the online market imposes, there are also plenty of opportunities that can help you reach success in various ways. Acquiring a small business that isn’t able to sustain itself on the market is a great opportunity to rise on the market.

This opportunity presents new possibilities to extend one’s reach on the market, acquire new customers and audiences, as well as gain a competitive advantage. However, purchasing a small business is no easy task. Aside from requiring a hefty investment, you must also consider whether or not that business is actually worth buying. There are many factors to consider before making an important decision and you mustn’t rush that decision. That being said, here are a few crucial things you must consider when buying a small business.

Conduct research first

Before you make a purchase, make sure your research the business you plan on buying. The more you learn about it, the better your understanding of whether or not this investment is a good option or not. Regardless of the nature of the business you plan on purchasing, you must understand the market it performs on and its overall performance in the past.

For example, find out whether the small business has a viable product or service, if it has an established consumer base, if it generates revenue and profits and so on. In addition, scout the business’s competitors to determine who you’re up against. If the main competition is too strong, you may not be able to further endorse your purchased business.

Understand how the business operates

One of the more important things you must focus on is understand how the business you wish to buy operates. The business model on which that company was based on may differ from the one you’re having in your own company. That’s why you must understand it in order to successfully run it after the purchase.

For example, get informed about what revenue model the business has, how often it generates revenue, if it’s owner dependant or not, how employees operate and if the business has a management team in place. These are just a few things you must find out about the business you want to buy. The better your understanding of their operations, the easier it will be to run it post-purchase.

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Determine the value of a business

One of the most important factors when buying a small business is its value. You must understand how the business is valued and if it complements the seller’s asking price. When determining business valuation, it’s not just about what property a business has or the price their owner would like to get. In fact, it’s about determining a small business’s market share, capital structures, estimated revenue, liquidation value and other business elements.

It’s important to understand that sellers may oftentimes overvalue their business, especially since they’ve invested time and effort into their business. However, the seller’s asking price may vastly differ from the business’s actual value. Therefore, you must conduct your own objective internal calculations, in order to determine the actual value of the business you’re about to purchase.

Consider financing

Not every entrepreneur has the ability to pay the full price in cash. Therefore, it’s advisable to consider those financing options that will make the transaction more seamless. For example, you should ask the seller if they’re willing to provide seller financing. Seller financing is a popular means of previous owner showing support for the new one. Simply put, the seller provides 10 to 25% of the purchasing price as a loan to the new owner, because the seller believes the business will be successful.

In addition, you can also consider bank or SBA loans to finance the purchase. However, purchasing a business may set your own finance back or even impact your cash flow. To avoid common financial difficulties, you can also consider credit line. Once approved, corporate credit line providing your business working capital by allowing you to borrow an amount of money you need at the moment.

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Due diligence

Another important aspect to consider is due diligence. Due diligence is a process of going through all the necessary documentation of the business you’re about to purchase, as well as obtaining all the paperwork for the purchase itself. In most cases, sellers won’t tell you which documentation you should look at, so it’s up to you to do your homework.

For an example, there are documents you must revise before making the purchase, such as business licenses, permits, incorporation fillings and at least past three years of the business’s tax returns. Also, financial documents, such as Income statements, the balance sheet, cash flow statements etc. and other documents, e.g. legal records, employee information, commercial leases and so on. In addition, you must obtain documents after the purchases, such as the purchase agreement, bill of sale, transfer documents and so on.

Buying an existing business can be a great opportunity for growth. However, purchasing a business is never simple. There are a lot of factors to consider before buying, so that you can guarantee that your investment was in fact worth the cost.