If you are buying a business, you’re on the right move! Buying a business is a major, exciting achievement. You know the value of creating your job, having a flexible schedule, and earning more through your hard work.
While all of these benefits are attractive, buying a small business does have some legal hurdles you need to get through before you can start to reap the rewards. Investing time in your due diligence and legal research can help you avoid mistakes and frustrations.
Here are some of the most essential things to consider when buying a small business.
Read on!
Financial Records
Ensure that you have a thorough understanding of the history of their financial statements and documentation. That may include:
- the latest balance sheet
- past income statements
- detailed cash flow forecast
- key performance indicators
- current and forecasted profit & loss statements
- tax returns
Additionally, request evidence of any government grants and payments they may be currently receiving or have received in the past. Make sure everything lines up and there are no discrepancies between the financials and the purchase agreement. That includes looking for potential hidden liabilities and any future commitments.
Assess the amount of debt, if any, that comes with the business, and check for any operational costs like leases, payroll, and property taxes. Finally, be sure to read and understand the warranties and guarantees that are in the purchase agreement to make sure you’re adequately covered in the event of any issues.
Business History
The business must have a record of solid performance and a successful track record to make sure its long-term survival is assured. Pay attention to the type of business you are buying and its existing customer base.
Understand the financial situation of the business and see detailed records, such as Profit and Loss Statements, to measure the success. If the business has ever been through bankruptcy or insolvency, be sure to thoroughly investigate why this occurred and whether there are any ongoing repercussions.
Growth Potential
When considering growth potential when buying a small business, there are several essential things to evaluate.
Are there any adjacent markets with growth potential that could be opportunistically entered into? What is the competitive landscape like?
Are there barriers to entry that would make it difficult for competition to enter into the space? Are there any resources you can leverage to further expand the business?
Additionally, analysis of the activity of current customers is important in understanding the growth potential of the business. Who is the customer and what types of needs are they likely to have in the future that you can benefit from?
Furthermore, is there a market opportunity for a new product or service? Understanding the current customer base and the opportunities for new markets is a great way to assess the growth potential of the small business.
Market Competition
Your potential customer base needs to be strong, and competition can help to assess this. A high number of competitors in the same industry can be a sign that the particular market is strong and lucrative, while sparse competition could be a warning sign of declining interest and success.
Analyze the competition in terms of their quality and scope:
- offerings
- prices
- customer loyalty
- customer demographics
- business practices
In addition, be on the lookout for any potential risks associated with high market competition in terms of:
- pricing wars
- false advertising claims
- litigation, etc.
By looking at these characteristics and conducting thorough research, you can determine if a small business is the right fit for you.
Deal Origination
This means understanding where the leads have come from and who is responsible for finding them. Ensure the business has solid referral processes in place and that they are constantly seeking to find new potential clients.
Furthermore, pay attention to the specifics of where the company’s assets are being sourced, as well as the current level of liquidity in the industry. Analyze how the company’s business assets are being managed and what type of debt structure exists for the business.
By utilizing the right deal orgination process, one can ensure they are making the right purchase decision when buying a small business.
Legal Liabilities
Some of the key areas to address include ensuring the business is in compliance with taxation laws and regulations, workplace health and safety standards, and union regulations. It is also important to check that there are no contractual or other legal obligations that would potentially affect the operation of the business.
Furthermore, one should determine if the company has any pending lawsuits or has any outstanding disputes that need to be addressed to avoid potential problems. Finally, it is wise to investigate the ownership history of the business and any potential liabilities related to past owners. With these in mind, one can confidently make an informed decision about the purchase of a small business.
Current and Expected Employees
It is important to look into the stability of the current employee base of the company, such as the:
- amount of turnover
- job satisfaction
- length of time
These of which employees have been working for the business. Additionally, it is important to research the future employment needs of the business. Are there any new positions that will need to be filled?
The future employee needs of the business will determine how much capital and resources will need to be allocated when purchasing the small business. Understanding the current and future employee needs of the company will lead to better decisions when buying a small business.
Know What to Look for When Buying a Small Business
Buying a small business can be a great investment, and being informed of the different important factors to consider can ensure a successful transaction. If you are looking for a small business to buy, be sure to research the company and take a careful look at its financial records, location, market, and any other applicable details.
Don’t hesitate to reach out to the seller and ask questions to help ensure you make the right decision!
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