It is a known fact that purchasing an already existing small business poses fewer risks as compared to starting from the grass-root level. There are several reasons why this is true. Firstly, an existing business already has inventory and equipment and often has a secure location with some time left on the lease. This means that you don’t have to go through the effort of setting up the business, which will save you a lot of time and negotiations.
Existing businesses also typically have employees, some of which you may hire as soon as you acquire the business. However, you should not feel the need to keep them onboard just because they have been with the business. An existing business will also have a loyal customer base, most of which will likely stick with the business once you acquire it. That being said, the most important reason to acquire a business over starting up your own is that the business you will acquire will have had a track record which you can check through its business records, books and tax returns. You can get a clear sense of the total amount of money that you’re going to make after acquiring it, making it an overall less risky proposition.
While it may sound easier to acquire an existing business as opposed to starting one, it is not as though there is no risk of finding a business for sale in your local area. Whenever you purchase a business that already existed and you take a look at its past records, you’re delving into its past. No one can guarantee that things will never take a turn for the worse in the near future, particularly if you misinterpret the financial and business statements to assume you are going to make more money than you actually are.
Factors to consider while performing your ‘due diligence’ checks on the business.
1. ODI or Owner’s Discretionary Income
This is the amount that the seller is getting from the business after he has shelled off money to his employees, and suppliers, after he has paid off his rent, taxes and all sorts of other overhead expenses. In case you think you won’t be able to live on the present ODI or you tend to notice that this ODI has been plummeting for many years now, be alert. This implies that the business is not doing a good job in the market and has been having lagging sales. On the contrary, if ODI is healthy enough, get the owner to put it in writing and delay on your purchase price for few months.
2. Political and geographical changes
Are too many business owners trying to sell off their businesses all at once? If this is the situation, there’s something wrong. What is the reason behind this action? Is there a change in the community that is being predicted? Is the entire population skewing younger or older? For example, if you are looking for a business for sale in Michigan, you need to be tapped into the local community to be aware of any changes that may occur. To look into this, visit the Office of Local Planning and Development to check whether or not there are any upcoming zoning law changes which could have an impact on the business location.
3. Sales taxes
Whenever you purchase the business along with its assets, you avert the liability for the seller’s obligations, debts and liabilities except for the business’ sales taxes. Do you think that the business seller has long been underreporting the sales taxes of the business? If you feel this might be the case, you may want to decline your purchase in the business, as the state tax authority will run after you for each and every tax amount that the seller owed. You may even be sued for the back taxes, as you’ll be the one who is solely liable.
4. The reputation of the business
If you thought you would just check their hard data and that would be enough for you, you’re wrong. You should still visit the library and check local industry publications which date back to at least 5 years. You have to check whether the business is active within the community, whether or not it has garnered any negative publicity and whether it has any complaints against it.
So, before you find out a business that has been put for sale and you start negotiating with the seller, keep in mind the aforementioned risk factors.