What to Do Before Buying a Business

There are a lot of ways to make money out there. Millions of jobs exist throughout North America in diverse industries, which is the primary method for generating income. However, another option to make money is to become a business owner. Maybe you have a long history in a particular field and believe you could run a brand effectively. Perhaps you have a great idea for a new business and want to start a company from scratch.

If you do not have the desire to start your own business, then there is always the option to buy an existing company to become the new owner. While that may sound simple and seem like a quick way to become your own boss, it is also very complex.

Buying a business can quickly become an effective way to generate income for yourself. As the owner, you get to choose how to use the profits either as salaries or to re-invest in the company. Before you get to this stage of ownership, there are a few things that must happen first.

Choose a Business

The most obvious step in buying a business is finding one that is for sale. There are many reasons why a business may be up for sale by the owners. Perhaps they have been in charge for a long time and want to step down as owners as the company continues. Maybe there have been financial struggles that the current owner is incapable of overcoming. A business owner may need funding for a new venture, and selling their current company could be the solution. Choose an industry where you have either experience or a lot of practical knowledge as you search for businesses to purchase. For example, if you have lots of professional experience in the food service industry in Canada, then restaurants for sale in Calgary, Alberta, may be right up your alley. 

Determine Its Value

One thing you are probably going to encounter when buying a business is an owner overvaluing their company. They might be overvaluing it to try to get more profits from the sale or they may be attaching more sentimental value to the price because of their long history of ownership. Either way, you need to determine what the business is worth for yourself to get a good deal. If you know what to look for, then you can do it yourself. However, if you feel overwhelmed by the terminology, acronyms, and numbers that communicate a business asset’s value, then you may want to hire a professional to assist you. Valuing a business accurately is complex, so make sure you understand how to do it correctly before agreeing to buy. If you hope to make a profit to generate more wealth, then it starts with acquiring the business at a fair price.  

Review Business Records

The amount of information that you can access before a purchase is often limited initially. It isn’t until you sign a letter of intent with the seller that you can take an even deeper look at the company’s financials. Once you have signed the LOI, it is time to get into the nitty-gritty of the numbers. What do their tax returns, income reports, and cash flow statements say? Is there existing business debt from the property, equipment, vehicles, loans, or other assets? How many employees are there and what are their wages/benefits? Are there any liability issues that have occurred in the past or are happening right now? Some of these data points may even reveal why the owner is selling the business. A thorough review of all the company’s records is necessary to ensure that your purchase is solid. Plus, it will inform you about the direction of the company in the past few years so you can make wise decisions when running the business going forward. 

Secure Funding

Unless you have a lot of capital to spare, you probably cannot afford to pay the full price for the business upfront. For this reason, you should have a plan for funding in place as you are researching the company’s records. There are many ways to fund your business purchase. You could secure funds from outside investors who want a stake in the business. The most common strategy is to secure a small business loan. The more money you have for a down payment, the lower your loan terms will be as you pay back the debt. 

Spend a Lot of Time in the Planning/Researching Phase

The key to being successful when buying an existing business is to plan well. Buying a company comes with plenty of risk, especially if the brand is in a difficult place. The worst thing that could happen is you overspend on the acquisition and then discover issues that make profits nigh impossible to accomplish. You can mitigate this problem by doing plenty of research and planning. Do your due diligence so there are no surprises and you can formulate a strong plan for leading the business toward success as the new owner.