9 Things to Consider Before Buying a Business

Business owners come in all shapes and sizes. For some, building a company from the ground up is the essence of entrepreneurship. For others, however, the thrill of entrepreneurship comes from the ability to buy an existing business and grow (or save) the company. Generally speaking, the process of buying a business is a long, complex undertaking. But in today’s fevered market, too many people are hurrying through transactions and missing some of the most essential parts of the process.

Estimates point to $2.5 trillion of possible cash in the private equity industry. Buyers throughout the globe are feeling positive as they consider things like high employment rates, growing production and performance, and organizations who are operating at capacity. This paints a perfect picture of opportunity for a buyer. In fact, financial experts have indicated that now is actually a great time to both buy and sell. So, what does that mean for eager entrepreneurs looking to purchase their next project?

The level of risk is innately lower when buying an existing business and entrepreneurs are taking notice. From a financial perspective, considerations shift from rough estimates to actual profit and loss figures and from hopeful plans to historical data to support the health of the organization. All in all, it seems like a great time to take advantage of an opportunity to buy a thriving company looking to sell…as long as the purchase process is founded in careful strategy.

Taking Over an Existing Business with This in Mind

It’s easy to get lost in the excitement of a big purchase, but buying a business is a decision that should be made with no haste. While some of the things to consider seem obvious (like looking over the financials), other factors may be less evident. Thinking about the seller’s motive, for instance, is a consideration with an emotional element and therefore requires an evaluation that cannot be broken down by numbers.

The lifestyle of an entrepreneur is often fast, exciting, and rapidly changing. Ironically, the act of purchasing a new company must be slow, thoughtful, and meticulously measured. As such, entrepreneurs should keep in mind the following considerations before buying a business:

  1. The reason behind the current owner’s decision to sell
  2. Due diligence prior to negotiating the transaction
  3. Business valuation and the method used by all parties
  4. The agreement should be drafted and reviewed by professionals
  5. A long history of the sales peaks and valleys throughout the years
  6. Careful analysis of past profit records
  7. Account receivables
  8. The lease on the premises of the business
  9. If an LLC or corporation, buy the assets not the business

No matter where the company is in its lifecycle, certain elements must be considered prior to purchasing an existing business. Beyond the above, buyers must also take into account things like sales and payroll taxes and state bulk sales laws. Plus, it is a good idea to get to know the employees and the culture prior to pulling the trigger. Finally, make sure that the seller stays around for a while after the sale to ensure a smooth transition.

Thinking through these elements is an important exercise to figuring out if a company is the right fit for you and your personal entrepreneurial goals. At Ellrich, Neal, Smith & Stohlmna, P.A., our trained valuation analysts have the qualifications and experience to value a business for a variety of purposes, including the purchase or sale of a business, divorce of an owner, estate and gift matters, business and contractual disputes, eminent domain condemnations, and to assist in financing. Reach out to our Miami or Palm Beach Gardens offices today to learn more!