Question: I am contemplating buying a local business. What should I consider and ask the current owner to provide?
Answer: Buying a business versus starting one from scratch has many advantages. A good existing business has a customer and employee base, brand recognition, and supplier agreements in place.
Hopefully the business you are considering is one that you currently work for or are intimately familiar with, and you have the background and experience necessary to ensure its continued success?
In any event your due diligence should include the following questions:
- Why is the current owner selling the business? Is he or she retiring or experiencing some life changing event? If not, proceed with caution. Doubt anyone would walk away from a profitable business unless there is some underlying problem.
- What about the financial health? Is the business dependent on several large customers? What are the profit margins? How many customer accounts are over 30 days past due? Is the owner current on bills he or she owes? Are they involved in any pending litigation?
- Will the current owners provide three years financials, copies of leases, customer lists, service contracts, and essential employee information if you sign a non-disclosure agreement?
- Is there a lot of employee turnover? What is their average tenure? Will key people remain with the company after the sale? Will the current owner stay on for a period of time to ensure an orderly transition?
- What is the current reputation of the business? Are they well regarded by both their customers and business associates? A tarnished reputation is a huge hurtle to overcome and can take years to repair.
- Is the owner insisting on an all-cash sale or is he or she willing to accept payment over a specified period of time? An earn-out method is preferable as this involves payment as percentage of earned profits. If an all-cash sale, a reasonable discount to the purchase price is warranted.
Once you have gathered this information, have it reviewed by a qualified attorney and accountant. Buying a business is a big decision. It impacts not only you but also your customers, vendors and employees. Your local SCORE business counselor can be a valuable resource in the decision-making process.
Gray Poehler is a volunteer with SCORE Naples. Business counseling on this and other business matters is available, without charge, from the Naples Chapter of SCORE. Call (239) 430-0081 or visit https://naples.score.org/mentors .The SCORE business office is located at 900 Goodlette Road North, in the Fifth Third branch bank building.