The Constant Entrepreneur: Advice for Running a Productive Business

Should you buy a business?

So you want to own your own business. There are basically three ways to get started. 1) Develop your idea and start your own company; 2) Buy a franchise; 3) Buy an existing business. I could write books on the benefits and pitfalls on all three of these, but today I want to talk a bit about buying a business.

In the last year I have worked with two people who bought companies and, quite frankly, were stung because they did not do effective “due dilligence” (business jargon for doing your homework).

The first was a small specialty repair shop. The prior owner talked a good story about annual sales, repeat customers, and profitability, but could not produce the records to validate the numbers. As part of the deal he also insisted on staying on the payroll for a year, as he had the “special expertise” needed to make the business work.

The second was a manufacturing company that had reasonable records that showed profitability, but a history of poor quality, and worn out machinery. This owner also insisted, as part of the deal, on staying on as the primary sales person, as he “knew the customers”. The new owner paid much more than the company was worth.

Buying a business can be a quick way to become an entrepreneur and to rapidly start receiving income. But, before putting any money down, make sure that the business is really worth what you will pay for it. Here are some tips:

1. Don’t rely on any financial information that is given verbally. Have a trusted accountant review all financial data and give you an opinion on the data.

2. Have an attorney review anything that you will sign.

3. Talk to employees, customers, and vendors to learn everything you can about the company, its services, its products, and its viability in the market. If the owner blocks access, walk away.

4. Get a professional to provide a valuation of the business to assure that you are not going to pay too much for it.

5. Carefully examine the facilities and equipment. Bring in an outside expert if needed.

6. Really understand why the business is for sale. Is the owner wanting to retire? Or, is the neighborhood deteriorating? Is the market drying up? Has a major competitor moved in across the street?

7. Never keep the former owner on the payroll. If you need training, include a certain amount of training time in the contract and, if needed, occasionally consult with the prior owner.

8. Make sure that the contract includes a non-compete statement so the prior owner does not open a new competing shop next door.

9. If possible, work at the business for a few months before deciding to buy it to get to really know the business.

10. Retain a business advisor to review marketing, sales, production, personnel, and processes before the sale – and have the advisor help you with the transition after the sale.

The list could go on and on. But what is important is that you know what you are buying, and that you are buying for the right reasons and for the right price. This will be one of the biggest investments you will make, and you want maximum assurance for a good return on the investment.

By the way, both of these businesses closed, for financial reasons, within three years after they were bought. A really tough lesson for both owners.

Will Limkemann
Limkemann Business Advisors
440-871-0076
www.neobizadvisor.com