If you are considering buying a small business or franchise it is important to plan and implement each step and avoid any pitfalls. The first tip is to stick with a business you know something about. Everyone knows something about retail, but do you have what it takes to make the buying choices, price the merchandise in order to make a profit, and know anything about displaying the merchandise in a pleasing manner. Some of this can be taught, some can’t.
You should not buy a business if you have no prior knowledge of how it works, or it is something you aren’t familiar with. You don’t need to know everything, the current owner or franchise company can provide specific training. But you should understand the primary aspects of the business. For instance if you know nothing about toxic waste disposal, and don’t even have a working knowledge of what toxic waste is, this probably isn’t a good fit for you.
The current owner of a business or the franchise company will probably make running their business sound very easy. It is up to you to ask the right questions and understand your own limitations.
If you’re close to buying a small business, see here for a checklist to ensure you are asking the right questions and that you examine the right items and documents within the business.
The Transfer of Knowledge
If you are buying a business that is seasonal, in other words it has a specific few months during the year to make a profit, then you should contract for at least a full year of time and support from the current owner. If the business isn’t seasonal, then a minimum of three months support should be part of the contract to buy the business.
Make sure you specify in writing what type of support you are buying. Is it a monthly phone call, a couple of hours a week at the store, a set number of hours per month? If you don’t specify, they could take off for a month in Hawaii and call you at the end of your trip. If you can, arrange the contract so that you hold some portion of your down payment until the current owner has fulfilled the contracted support. This way if they don’t provide what they promise, you would have some money to seek a consultant if needed.
Know Your Limits
Before you start looking for a business to buy, certainly before you start negotiating for a business, you need to know what your limit is. Have a high end price in your head that takes into account what the business is worth, and what you can afford to pay. You don’t want to go into the business with no money to buy product, advertise, or make any needed upgrades or changes. It isn’t the buying of the business that is important, it’s making a viable income once you have the business.
Know What You Are Buying
Often when you buy a business you get the leases, the inventory, any open invoices that the company is liable for, as well as any lawsuits, tax liabilities, and more. This can be debts that the company has proof of, and any that might show up after you close on the deal. There are also ways to purchase only the assets and the owner’s shares in the company with out being responsible for liabilities.
If you purchase the business in this manner, then you can still be required to address and pay for any current or future lawsuits. Even if the current owner states in the purchase contract that he will be responsible for anything that happened before you bought the business, if something happens to him or he doesn’t have the means or money to address these lawsuits, then it still will come back to being your responsibility.
Make sure you take the time and effort to find out about potential problems before you close on the business. Check with the better business bureau, the owner’s liability insurance company, and even take the time to check if there are currently any liens on the business.
Know what you are buying may belong to the employees, especially if you are buying a service company. It is important to get a feel for who plans to stay, who plans to retire or take the customers and start their own business as your competitor. Often buying a service company can be just a bit risky. If customers hated the prior owner, it will take them some time to warm up to you. If they liked the prior owner, they may not be happy with the way you do things, and if you try to change something…your customers may all jump ship. It is really important to do your homework when you are buying a small business.