Things to Consider When Buying a Small Business

Things to Consider When Buying a Small Business

There are many roads that an ambitious person can take to entrepreneurship. Some people may come up with a great idea or use an existing skill that they have to go into business for themselves. Others may choose to invest in multiple ventures and live off the revenues from their profits. There are also entrepreneurs that buy into a franchise and reap the benefits of using an established brand. Another option that some entrepreneurs choose to explore is the purchasing of a small business that is already in operation.

Buying an existing business has some great advantages, such as already having an established product and customer base. However, things are not always as they seem on the surface so it is always good to do your research before making the decision to buy a small business. Below are some things to keep in mind when deciding if purchasing a small business is for you.

• WHAT are you buying?

  This may sound like a stupid question but it is a very valid one – what exactly are you purchasing? Are you buying assets that make up the business, purchasing one asset that creates products to generate revenue, or buying the right to offer a service to customers for a profit? Know exactly what the purchase price includes and how it generates money.

• How does the business make money?

  Evaluate how the business makes a profit. Does it come from the sale of products or from a service that is offered to consumers? If the business sells products or offers services, do you have the capability to produce the products or perform the services at the same or better quality as the current owner who is selling the business?

• The assets

  When buying a business, you must analyze what you’re getting. If your purchase of the business includes equipment and/or a physical, make sure you get full disclosure on any debt that comes with it.

• Cash Flow 

  The most important thing to consider when buying a business is if it is truly profitable. The current owner may boast about generating $100,000 in cash each year. However, you need to also ask about the expenses. If the owner is generating this kind of cash but is paying out $110,000 each year in expenses, then you are looking at a business that is not making money at all. You may be able to turn things around, but evaluate what that would take and what the current owner is doing wrong before considering the purchase of a bad business

If you want additional guidance on evaluating the purchase of a small business, book a free consultation with Terry Kime, CPA at www.paramountbusinessadvisors.com. You can also connect with Terry Kime on LinkedIn. 

Read more great tips like these on my CPA blog.

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