How to Determine if You Should Buy an Existing Business

Buying a business presents several amazing opportunities. You’ll absorb their customer base, work on an already well-known brand, and reduce your startup time, among others. However, it can also be a disaster waiting to happen, particularly if you didn’t do your homework thoroughly enough.

Take Andrew Cagnetta’s case as an example. At 25 years old, he had acquired a pasta shop in Wethersfield, Connecticut. He maintained the recipes and products, but still, customers complained that the food quality has changed. That resulted in a drop in sales, forcing Cagnetta and his co-owner to sell the shop.

What could’ve gone wrong? Cagnetta realized that the pasta shop’s previous owners were integral to its success. And what he failed to realize was that he never asked them what motivated customers to come to the shop.

Therefore, before acquiring a business, however promising it is, it is crucial to investigate meticulously first. Below are the steps you need to take before embarking on your first acquisition project:

1. Ask The Owners About the Biggest Challenges They’re Facing

The present challenges of the business will become yours, too, once you acquire it. If you found that a business needs at least $1 million in capital improvements, for example, then you can take that into account while still in the negotiation stage.

2. Ask About the Opportunities The Owners Didn’t Pursue

Asking this lets you learn the growth potential of the business. Maybe the current owner didn’t tap a particular market when it could’ve led to massive growth.

3. Find Out the Owner’s Plans If They Can’t Sell

If the current owner will give the business to an employee, or just close it if they can’t sell, that could be a sign that you’d have more room to bargain their price.

4. Learn About the Business’s Finances

Ask for financial documents, which include the balance sheet, profit and loss statements (past five years), tax returns (past five years), audited financial statements, and more. Analyzing the business’s financial standing is one of the first things you must do. That lets you discover if they have unpaid debts, which could result in their creditors seizing the selling the business’s secured assets, even if you’re already its new owner.

5. Inspect Tangible Assets

If your purchase includes tangible assets such as inventory and equipment, have those professionally inspected to ensure that they’re in good working order. If the equipment is leased, study the lease’s terms to ascertain that you can take it over.

Concerning the inventory, check if they’re still marketable. Obsolete inventory may be a red flag.

6. Check If The Business Has Any Lawsuits

The business’s legal status will be yours to acquire, too. Obtain the owner’s response in writing so that it can serve as evidence if they turned out to hide information.

7. Read The Lease Contract

reading lease contract

Some lease terms require a business to move out of a location when it changes owners. Read the lease contract thoroughly, and talk to the landlord if any major action should be taken.

8. Don’t Pay in Full Immediately

At the time of closing, hold back a portion of the purchase price. Arrange for it to be paid in at least six months. That protects you from more significant losses should the business meet a major issue, like a lawsuit or unpaid debt.

9. Get Consulted Regarding Post-Merger Integration

Experienced post-merger integration consultants help you achieve the benefits of the acquisition as soon as possible. Also known as merger and acquisition integration, post-merger integration is the process of combining the operations and systems of two businesses. That lets you address potential issues, key personnel, company culture, and others. In turn, you can implement a sound conversion plan, and ultimately bring the business to massive success.

Once you’ve taken the time to follow these, you can avoid mistakes that can cost you a lot or affect your current business. You can also ensure a smoother and more manageable process.

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