What Dangers Are There in Buying a Small Business?

You have the money, the time and the energy to purchase your first or another small business. So, is there anything stopping you from such an acquisition?

On the surface it sounds like a relatively rather easy question to answer, but there are a number of underlying layers that need to be covered before you sign your name to a deal for such a purchase.

In the event you find yourself in the position of possibly buying someone’s company, it is important to clearly define the reasons behind the proposed purchase by listing a number of questions.

Among those questions should be:

• Why do you want to sell at this point and time? – While many times the reasoning is sound, make sure you’re not getting yourself into a bad situation, i.e. major debts on the part of the present owner, customer complaints, low rankings from the banks, etc. Ask to see the company’s financial statements for the last several years to see if there are any troubling patterns of handling finances.
• Who is your competition and what has their success rate been in this marketplace? – Another area of interest should be the competition you would potentially be going up against. Do as thorough an investigation of the marketplace prior to any deals to buy the business, including online competition and not just those physically on the ground. If you are potentially getting into a market that is either not going to be beneficial to you or will thoroughly exhaust your resources, think twice about it;
• Will you finance a portion of the acquisition cost? – In some instances, sellers will finance a portion of the sale. While some potential buyers may be afraid to broach this subject with the seller, it never hurts to ask. Not only can it save you some potential money, but it will also give you some reassurance that the owner thinks his or her business is a risk worth taking, given they are including some of their money in the acquisition price;
• Would you stay on with the business for a period of time? – In order to make for an even smoother transition, see if the owner will work for you for a period of time until you have a good feel of running the business. The period of time should be anywhere from a few weeks to a few months;
• What is the time frame for getting this deal done? – Just as in buying and/or selling a house, you need to iron out the proposed time frame for a deal. The last thing you want is for negotiations and the final sale to drag on for an extended period of time. If the seller seems in a hurry to unload the business, think twice before buying, as they may be trying to dump their problem into your hands;
• How Would You Best Describe Your Customer Base? – Any potential buyer wants to know who exactly they may be offering products and/or services to. Talk with the current owner and get a snapshot of the customers he or she currently has. What are their tendencies when it comes to buying, providing feedback, etc.? Going into a potential sale without knowing who you might be working with is a major mistake. You also will want a measuring stick for the local economy where you will possibly be purchasing a business so that you’re not going into a potential disaster scenario, whereby you come out the loser financially.

At the end of the day, purchasing your first or another business takes due diligence and the ability to see through and bad intentions on the part of potential sellers.