Buying a small business is a more convenient way of entering entrepreneurship than starting a new business from scratch. Since the small business is already running and generating revenues, you can begin operations immediately after the sale. Moreover, existing inventory, account receivables and established customers help maintain cash flow, making it easier to earn profits. Nonetheless, due diligence must be performed to ensure that you are buying the right business. To simplify the buying process, this post discusses five important considerations before buying a small business.
Investigate Seller’s Objective
Before buying a small business, investigating the existing owner’s objective of selling is very important. If the previous owner is selling to retire, then there is a high probability that the business is still capable of earning profits. However, sometimes business owners sell their business to raise money for personal requirements, bankruptcy or due to the fear of rising competition. Surely, analyzing their true motivation behind selling indicates the business’s true worth.
Research The Business
Once you are clear about the seller’s motive, now it is time to research the business itself. While researching a business, find out its number of competitors, current market reputation and potential for growth. Furthermore, evaluate if the business belongs to a healthy and growing industry. Of course, talking to customers and suppliers will provide valuable insight about how the business is performing. Thorough research enables you to make well-informed decision about buying a small business of your choice.
Check Business Documents
Thoroughly checking business documents is the next step towards completing the due diligence process. First off, go through organizational documents like partnership agreements, articles of incorporation and business certificates to verify the business’s credibility. Then, find out if there is any outstanding tax liability. Definitely, examining all relevant business documents will reveal whether buying it will be profitable.
Evaluate Revenue Generation
Steady revenue generation indicates positive cash flow. When purchasing a business, evaluating how much revenue it generates it a top priority. Start by checking the last three year’s financial statements, determining the present financial condition. While reviewing the balance sheet, focus on last full audit report. In absence of a recent audit report, you can request owner to get one done. A successful audit will prove profitability. Additionally, a look at inventory will tell you if products are getting sold regularly or not. Certainly, the value of a business depends on its ability to generate income, making it worth a worthwhile investment.
Determine Total Asset Value
The cost of buying a small business depends largely on its assets. By determining the total asset value, you can gain a better position to negotiate prices with owner. The tangible assets of a business include equipment, store location, lease, inventory products and patents. But, make sure each of these assets is free from debts that may pass on to you with the ownership. Undoubtedly, calculating asset value can enable buyers get a favorable sale price.
To purchase a small business, performing comprehensive due diligence is required for a successful deal. Prospective buyers should evaluate the owner’s motivation of selling, business’s market reputation and consistent revenue generation. Additionally, you should examine business license and tax receipts to make sure that it is legitimate. Finally, calculate total asset worth to successfully negotiate a buying price.