Acquiring an existing business can be a shrewd move. While you can save on many of the sunk startup costs, there are still other risks which you need to take into account. Here are three questions every prospective new business owner should ask, before acquiring a new business:
Why are the current owners selling?
This is perhaps the most important question to ask. The current owners of a business have a nearly complete understanding of the issues within the business, especially if they have been operating it for an extended period of time. While it is probably fine if they are selling because the business has grown too fast for them to manage, or if they want to divest themselves of it to enjoy retirement, there could be other reasons to be aware of. Perhaps the industry the business is in has now reached maturity, and will start to decline soon. Key employees may have left, either to work for a competitor, to retire, or to pursue other interests. These are all good things to know, before you sign any contracts.
Do the current owners have books which your own accountant can look at before purchase?
Having your accountant check over the operating numbers of the business is another important step to take before purchase. You not only want to verify that any claimed results have actually occurred, but also have evidence that other desirable elements (such as a good system of internal controls) are in place. Your accountant can help you determine whether the business’ operating results are in line with what a typical business should be earning, and if there are any irregularities which should preclude the sale from being made.
Have you had your attorney examine the contract of sale, to include protection provisions for you?
Finally, you should have your attorney carefully check over the contract selling you the business, as well as any other legal documents you must sign to complete the transfer. A good business attorney can help make you aware of any issues, as well as common problems which business owners can encounter. A well-drafted contract will protect your rights, so that you can get out of the sale, if everything which was promised, is not delivered as you had expected. Since more people have problems with “understandings” (where each party understands the details to read as they want them to!), than with carefully worded contracts spelling everything out, it pays to have your attorney look everything over closely to avoid unpleasant surprises.
Quite simply, once you understand the real reason for an owner selling a business, have an accountant check the books, and have an attorney proofread any contracts, you are better protected when purchasing a new business, than if you did not perform these actions. While there are still other steps you might want to undertake (such as having an industry expert examine the business, and offer an opinion), these are the bare minimum steps every prospective business owner should take.
Copyright 2010, by Marc Mays
Marc Mays is the creator of
http://www.myplatinumparachute.com/”>http://www.myplatinumparachute.com/, which helps first-time small business owners obtain the critical skills needed for their small business success.