Dec 5, 2022 | Starting a Business

What factors should I consider when buying a business?

Q. Dear Zenagos,
A friend of mine is retiring, and he offered to sell me his business. I hadn’t really considered going out on my own but this seems like an unusual and maybe rare opportunity. What factors should I be considering?
–Elijah

Before you buy a business, you need to be sure that you are cut out to be an entrepreneur. When your money is tied up in a business, you may not be able to just quit if you don’t like it. So, take the time to be sure that you know what you are getting into.

Is the entrepreneurial lifestyle for you?
There is a lot to love about owning your own business. Whether the lifestyle of an entrepreneur works for you depends on your personality and the other commitments in your life.

Advantages of Owning a Business

  • You get to be the boss and make the decisions
  • You decide when and where you work
  • You set the company’s goals and direction
  • You benefit from your hard work and success

Disadvantages of Owning a Business

  • You never really get a day off, and it’s hard to take a real vacation
  • If your employees don’t do their jobs, then you have to do it
  • You are responsible for any errors made by the business
  • It may be challenging to get your money back out of the business

Before you take on the lifestyle of an entrepreneur, make sure that you have talked it over with your family and friends who will be affected by the decision. They know you best and will be able to provide important perspective.

Can you handle uncertainty and change?
Market conditions can change in rapid and surprising ways. Market conditions are changing all the time, and sometimes there are market shocks, including global conflicts and pandemics. A business that looks easy today may suddenly become challenging. If you are flexible and adaptable and respond well to change, you may love the problem-solving required of an entrepreneur. If stress undoes you, then owning a business may not be for you.

Is the business healthy?
When you purchase a going concern, you receive the business’ assets, but you also accept its liabilities. You will want to hire an attorney and maybe also a business broker to conduct an evaluation process (called “due diligence”) that will protect you. Your attorney will ensure that the legal entity for the business exists and that the person selling it has the right to do so. You need to know that there are no liens, lawsuits, or judgments that will present nasty surprises. You should background check all existing employees and set up an escrow process for transferring bank accounts and other assets. And, you should dig deep into the company’s operations, so you know as much as possible before you make the commitment.

You should also have a clear idea for what you intend to do with the business going forward. Are there ways that you could improve the company’s revenue, reduce its costs, or add new product lines? It’s important to focus on growth, since you never know when existing sources of revenue could diminish or even dry up.

How will you get your money out of the business?
Owning a small business isn’t like owning stock in a publicly traded company: You can’t just sell your shares whenever you want. In order to sell, you need to find a willing buyer. So, when you put your money into buying the company, you need to think of that money as gone. It will be out of your reach until you have a signed deal to sell the company. A deal is never done until it is fully closed. Could you live with it if you lost your investment entirely? If you couldn’t, then it may be better to be an employee at someone else’s company, where you bear less personal financial risk.

Having a chance to buy a business in a field you know well may be a truly rare and wonderful opportunity. As long as you take steps to protect yourself and fully research the business, you will have the information that you need to make a good decision.

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