If you’re looking to buy an existing business, you’ll need to do a lot of homework to make sure the company fits your immediate needs and long-term strategy.
If you’re looking to buy an existing business, you’ll need to do a lot of homework to make sure the company fits your immediate needs and long-term strategy. You’ll also need to do some soul-searching to determine whether buying an existing business is really in the cards for you right now.
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Look for these six specific things as you do your homework.
Support From Your Personal Network
This is arguably the most important consideration you need to make as you assess the viability of buying an existing business.
Entrepreneurship is hard no matter what, but support from family and friends unquestionably eases the burden. This is especially true when you expect your loved ones to lend a hand with the business—a common arrangement for new entrepreneurs.
“As the spouse of an entrepreneur…I play roles that arise from the company’s needs and what needs to get done,” says Entrepreneur contributor Kristy Rampton. “These roles don’t always emanate from my personal skill set.”
Strong Base of Existing Clients
Dig into the books of your buyout target to suss out the quality of its client base. How many clients does the company have? How frequently do they buy? How much do they spend? Are they loyal?
“When assessing the quality of a company’s client base, you need to go beyond headline numbers,” says George Otte. “You’re looking for existing clients on whose continued loyalty you can actually count.”
Interview as many existing clients as you can. This is a great opportunity to get their unvarnished opinions of current company leadership, as well.
Solid, Scalable Business Model
A high-quality business should have solid “bones” in place—a standing structure, a coherent model, a client base (hopefully: see above).
All of these elements, and more, are important. But a strong, scalable model is especially important for growth-minded entrepreneurs. Before you buy, ask yourself whether the company’s existing model can support substantial growth with minimal tweaks.
Not every independently owned business meets this test. When in doubt, look to franchisors that have proven their worth time and again. The Small Business Administration has a great primer on buying franchises—check it out before you do anything else.
This is a critical consideration for entrepreneurs buying inventory-heavy businesses, such as OEMs and distributors.
For the uninitiated, the prospect of buying a business with a fully stocked warehouse is tempting—and worth the inevitable purchase premium. Unfortunately, sellers too often take the opportunity to offload junk inventory—outdated or damaged products, for instance—on inexperienced buyers, betting that it’ll get lost in the shuffle.
Don’t get hoodwinked. If necessary, hire an expert to audit the company’s inventory, and don’t be afraid to call out the seller during negotiations.
Competent Upper Management
If you’re buying a mature business, there’s a good chance it has a well-developed corporate hierarchy. You want this hierarchy to be solid at every level.
Probe the company’s senior management team, learning as much as you can about their professional backgrounds, areas of expertise, and job performance. Can you trust them to run a tight ship when you’re not in the office?
Since replacing senior management is an arduous, expensive task under the best of circumstances, the answer to this question could make or break your buying decision.
Few Skeletons in the Closet
“Skeletons” here include tax troubles, pending or unresolved lawsuits, hidden debts or liens, and the like.
For obvious reasons, sellers are typically reticent to divulge such matters. No matter how strong you believe your turnaround skills to be, there are some challenges that simply aren’t worth taking on.
Are you planning to buy an existing business? Share your insights in the comments section below.