There is a myriad of reasons why someone can decide to sell a business, and most of them have nothing to do with the actual business’ financial health. On the other hand, if you are ready to invest your money in an established business, you need to make sure your investment is protected. This is an essential step in order to create capital protected investments. The only way to minimize risks is to get as much information as you can about the business itself, and about the seller. Here are some essential things to consider:
- Before signing anything, go to a service like Check People and run a background check on the current owner. You’ll want to know, for example, that there are no bankruptcy claims or liens related to the business.
- Determine the value and business financial health. To do so, you’ll need to hire an acquisitions attorney, and you’ll also need help from an independent valuations firm. With their help, try to determine how much of the company’s value depends on the current owner’s skills and/or connections (you don’t want all the current clients to leave with them).
- Perform a communications and marketing audit in order to determine the client’s perceptions of the business. Will you need significant efforts to clean a bad reputation? Sometimes it’s better to start anew instead of having to clean-up other people’s mistakes.
- With the help of your acquisition attorney, draft a sales agreement. Ask as many questions as you need in order to understand everything on it. Make sure it includes the necessary clauses to protect you as much as possible in case anything goes wrong.
Do you have enough money to pay upfront for the whole operation, or do you need financing help? This is very important, as once you sign a sales agreement, you are bound to fulfill it. There are several ways in which you can get the money you need. Some of them are:
- Business loan: Most people choose to get a loan through a bank, but there are several Fintech loan options that may offer better interest rates or terms. Before you take out a loan, have a business plan to ensure you’ll be cover every payment.
- Seller Financing: In this case, the seller allows you to pay for the business in fixed installments. Usually, it contemplates interests, so before making a choice, weigh all your options.
- Venture or Angel Investments: In this option, an investor gives you the money you need in exchange for a stake in the business. While it can be an excellent option to stay out of debt, it is important to research potential investors, understand what they will ask from you and determine if you’ll be able to meet their expectations.
While you may think that you have everything you need to run the business, you need to understand daily operations to know if you’ll actually be capable of running it. Some essential aspects of a business operation are:
- Organizational chart, list of employees, and employee contracts. Make sure you’ll be able to make staffing choices without legal implications.
- Incorporation and tax documents
- Occupational Safety and Health Administration requirements. These are essential to make work safety a priority.
- Industry, market history, and current market trends.
- Customer patterns
- How to conduct returns in merchandising
- Accounts receivable and accounts payable
- Complete list of liabilities (consider getting a professional opinion from a trusted attorney)
- Five-year financial statements
- Sales Records
- Transition Time. In your agreement, determine a transition time in which the current owner stays on board and advises with operations.
If all these steps seem a bit too much, and you are overwhelmed about everything there is to do, consider using the services of a business broker. They can help in:
- Prescreening businesses and offering you a list of good opportunities that match your needs and expectations. They’ll take care of most of the due diligence steps.
- Helping negotiate the best possible price, payment plan, and conditions.
- Drafting paperwork. They understand the latest regulations and the most effective ways to cut through bureaucracy.
Take Your Time
Buying a business is an important decision that can have life-altering consequences. Ask as many questions as you need in order to understand how the business works and why the current owner wants to sell it. Don’t give in to a seller that’s pressuring you to make a fast choice. Get help from professionals, especially in issues that require legal or financial knowledge, and never overlook any due diligence step. Remember that information is the best tool to mitigate risks, so find out as much as you can about the business itself, and about the owner.