It’s not unusual for prospective entrepreneurs to get doubts or second thoughts as they prepare to buy an existing business from its owner and make it their own. All business involves a certain amount of risk, and it would be foolish to go into a venture blithely. The mark of a good businessman or woman is the ability to evaluate risk and chose the one most likely to lead to success.
However, there are a number of red flags that should rightly discourage you from acquiring another small business. If any of the following factors apply to a small business you’re about to purchase from its current owner, you should conduct further research and investigation or consider backing out of the deal.
1. Misrepresentation by the current owner – If you catch the current owner of the business in a misrepresentation or outright lie about the business, consider all of the potential untruths you missed. Chances are that if the current owner isn’t being truthful about one thing, he or she is probably not being truthful about a number of other things. While not every misrepresentation is made consciously or with malicious intent, they are certainly a sign that further research is necessaryI. nvestigate other claims that don’t quite ring true, and you may also want to do a more thorough check of the business’ finances and market position.
2. Lack of capital on your part – If you’re buying a business because you think it may be cheaper than starting your own, you may want to reconsider. Even if you’re getting a sweetheart deal on the existing business, chances are that there will be unexpected costs that arise after you purchase the company. Factors such as employee or customer defections, unexpected maintenance, debt payments, etc. may end up requiring more money than you planned on spending. If you’re considering buying an existing business, make sure you have enough capital to make the purchase, and have a little set aside for other costs that may arise.
3. Debt – If you’re assuming the debts of the existing businessowner as part of your takeover bid, think twice before sealing the deal. Be sure to look over the business’ balance sheets to ensure that you’ll be able to make the debt payments and get the profits you need from the business to make the venture worthwhile. Also insist on full disclosure of the amount and terms of the business debt.
4. Need for a big score – If you buy a profitable existing business and maintain its track record of success, you can make a good return on your investment. Typically, you should recoup your investment on a business within three to five years. However, chances are you aren’t going to make the big money you would if you started your own business. Entrepreneurs who begin their own businesses are typically the ones who create the greatest amount of wealth from their ventures. Buyers of existing businesses, unless they make a big turnaround or tap an undervalued asset or market, usually make good, but not exceptional profits.
5. Heavy baggage – While big profits exist for entrepreneurs who can purchase a struggling business for a song and turn it around, it’s not a venture for the faint-hearted or inexperienced. Some existing businesses come with heavy baggage, such as a poor reputation in their communities, a lackluster employee base, legal troubles, zoning or other government regulatory difficulties, a bad location, etc. If there seems to be a lot of baggage involved with purchasing a business, you may want to consider another venture.
The true key to avoiding making a big mistake when purchasing a new business is thoroughly checking out the business and its existing owner. Check court records (which are publicly available) for information about lawsuits against the business or its owner, check newspaper and other articles for potentially negative news about the business and demand balance sheets and other financial information from the existing owner and have your financial adviser investigate them. Also perform a brutally honest assessment of your own finances to ensure that you have the money you need to buy the business and cover any subsequent costs.