When buying a business, both emotion and due diligence are elemental and essential.

Here are 10 key matters to consider when you find that magical business for which you’ve been searching. It covers important points that are sometimes overlooked when your head is in the clouds during the emotional excitement of a deal.

10 Things to Consider When Purchasing a Business

 1. Know that when you own a business it is a lifestyle change. 

The business becomes part of your family and demands attention. Make sure both you and your family are ready for it.

2. Is it a business that you know and understand? 

If not, do the research and make sure you learn about the business, its competitors and any changes that are due in the marketplace. There is usually public information available for almost any industry. Find out if there are any industry issues that will positively or negatively impact the business.

 3. Make sure it is a business you want to be in.

 Can you picture yourself working in it? It would be a good idea to meet with the owner and discuss in detail what he or she does on a day-to-day basis so you can get comfortable assuming that role or bringing in people to help you. 

For instance, if the owner is the person who also keeps the office computers up and running or repairs the vehicles, then you either need to be able to perform those tasks or hire someone who can.

4. Get a complete set of financials from the business and review them with a good accountant.

Make sure the accountant is one that is experienced in business transfer transactions. 

Bank statements, financial reports and tax returns should coincide with what the owner is telling you. Lenders will not finance undocumented income.

5.  Make sure the lease on the property is transferable to a new owner or that a sublease is acceptable. 

Get this in writing from the property owner. Be sure the rent is at fair market value, and if not, renegotiate it. If it’s a retail location, learn about the neighborhood and any zoning or construction projects that may affect the business.

6.  Do a business plan based on realistic expense and income figures that you have from the existing business. 

Factor in your personal living expenses that you must draw from the business to live on, such as mortgage, car payments, groceries, taxes. If you are borrowing money to buy the business, you must also factor in debt service — the cost of the loan. 

Will the existing cash flow continue after the sale, and will it be enough to cover the expenses? If not, how much cash will you need to carry the operation until it gets up to speed?

7. Evaluate your impact on the business. 

Are you going to make a difference to the performance of the business? 

Are you looking to maintain the status quo, or are you looking for growth opportunities? 

If all goes well, will the business provide the lifestyle you want?

8. Check to make sure there are no pending lawsuits against the business, or any other liability problems. 

You should engage a competent attorney, one who is experienced in business transfer transactions, to review documents and make sure that you understand your rights and obligations in any contracts.

An attorney can also draft a non-compete agreement for the seller to sign, as well as employment contracts for key employees who are critical to the operation of the business. 

You don’t want the seller or manager setting up shop down the street while you are getting your new business up to speed. It is wise to interview key employees to make sure there is a good fit.

9. Check to make sure the inventory is accurate. 

Do a complete physical inventory to check for quality and saleability of the stock. Is any of the product damaged, obsolete or exceeding expiration dates?

Inventory equals cash; make sure you know what you have.

10. If any special permits or licenses are required, how difficult is it to have them transferred to you as the new owner? 

Do you qualify to have them in your name, or do you need to hire someone who does qualify?

Feeling an emotional connection to the business you intend to purchase is important since it will be a large part of your life. 

However, during the due diligence process make sure you use common sense in your approach. Weigh the facts and try to take the emotion out of it. Do your homework upfront. While you cannot examine every nook and cranny of the business as someone looking in from the outside, you can certainly find out enough to know whether or not it is a comfortable fit and if it is worth the risk. 

There is no such thing as a perfect business, and there are always inherent risks  associated with any business venture. With proper diligence before the purchase, you will likely enjoy the rewards of successful business ownership, both financially and emotionally. 

Balancing emotion with due diligence is only half the equation. The next question centers around the difference between a smart acquisition and a costly mistake. 

It’s not just about verifying the numbers or spotting red flags; it’s about recognizing the underlying qualities that make a business worth owning in the first place. The following ten factors go beyond due diligence checklists to help you evaluate the deeper fundamentals of a potential purchase.

 10 Things It Takes To Buy A Business

No ten-point list can ever hope to supply you with every imaginable consideration when it comes to buying a business. The following factors – listed in no particular order – should be a good jumping-off point, but feel free to expand on them and dig even deeper to decide that the business you plan to buy is right for you.

1. Consider the History – Plan For the Future

Business price is typically based on historical factors – real estate prices, equipment and inventory value, the net earnings the business brings to the owner. Considering what you can do with the business once you take over should be a factor in determining whether it is a good buy. 

While future potential earnings are dependent on the efforts of the new owner, it is not usually a factor that is heavily weighted into the asking price of the business but can be the reason it is purchased and brings a price that is towards the higher end of the value range.

2. Look For a Solid Foundation

A business that has been shown to flourish despite past financial downturns is one worth considering. As the saying goes, “You can’t make a silk purse out of a sow’s ear.” This means that a weak company will hardly grow into a great one simply by making a few changes. With all the terrific opportunities out there, it hardly makes sense to buy a business simply because the price is right.

3. Acquire a Puzzle With All Pieces Intact, Or Readily Available

A company has a great product, but the store is in a bad neighborhood. A service-oriented business is foundering due to outdated equipment. 

If everything looks good but the previous owner simply didn’t have a clue how to pull it all together, or if only one element needs changing – moving to a better location, or upgrading the gear – there exists an opportunity to turn a great profit by doing everything better and making sound decisions.

4. Profit Versus Product

You have always wanted to operate a video game arcade, or a mattress store, or a gas station. And look – here’s one for sale in a part of town close to home. So what if the place hasn’t operated in the black for the past three years, or there is a huge competitor right down the street. 

Basing a buying decision solely on the product or service is a recipe for failure or, at least, infinite frustration. If you can make money by running the business, and the price you will pay appropriately relates to a decent return in a reasonable time frame, any other benefit is pure gravy.

5. Invest With Your Experience

The previous point aside, your success as a business owner will come much quicker if the skills and experience you already possess have value in the newly acquired company. 

Identify what it is that a new owner would need to bring to the table in order to take the company to a higher level. If those factors are part of your makeup, it could well be the right business for you.

6. Focus on Growth

Many high-tech start-ups failed during the Internet boom because business owners were so busy trying to raise capital that they had no time to make the company profitable. 

If the business you plan to buy may take every bit of your skill and effort to operate, you could be better off looking elsewhere. An owner’s role should involve expanding operations, improving the bottom line, and envisioning future growth. A company cannot move forward if the owner is constantly mired in day-to-day activities better left to subordinates.

7. Uncover Hidden Treasures

A thorough exploration of a company’s assets may well turn up profit opportunities previously unknown or unexploited by the seller. It might be a forgotten patent, a dormant trademark, or a supplier relationship that has gone sour. Examine every aspect of the business operation, and you may be in for a pleasant surprise.

8. Tell a Compelling Story

Another feature of the Internet boom was the “elevator pitch,” a process where the CEO of a company seeking capital needed to effectively tell the company’s story in the limited time it took to ride between floors of an office building. 

If the business you wish to buy has an easy story to relate – “we sell this at such-and-such a price, and we’re better than XYZ because…” – your success will be far easier to achieve. Too-long explanations and extended sales cycles can spell disaster under even the best of circumstances.

9. Know the Drawbacks

Any time you spend evaluating a business to buy should involve considering the negatives at least as much as the positives. If you know the problems ahead of time – slow deliveries from suppliers, ineffectual marketing campaigns, or a poor relationship with industry regulators – you will know what needs fixing from your first day in charge. Prioritize in advance, so you know what to address first.

10. Add It All Up

The seller has established a price for the business, a figure that includes both tangible (equipment, real estate, inventory) and intangible (good will, a client base, relationships with suppliers) assets. 

At this point, you must ask yourself one simple question: “Based upon my cash outlay, will I turn a profit in a reasonable amount of time with a fair (but not excessive) effort?” 

Don’t be afraid to call in the experts on this one, including your banker, CPA, attorney, business broker, or even a trusted friend. Set out the evidence and see what they think. Oftentimes an element has escaped you that could make the difference between success and failure. Don’t leave a huge decision like this to chance.

We’ve Been Trusted for More Than 50 Years: Work With the Team You Can Rely On

Whether you’re preparing to sell the business you’ve spent years building or searching for the right acquisition to grow your future, the team you choose to work with matters. Certified Business Brokers has been a trusted name for over five decades. 

Our dedication to our clients and tradition of excellent service deliver results for buyers and sellers. Need assistance? We invite you to contact us.

We’ve already discussed factors that can help you decide whether a business is the right one to buy. When you’ve made that decision, the due diligence doesn’t stop. Even a business that checks every box above can come with a costly surprise buried in the fine print: unpaid state taxes left behind by the previous owner.

Ensure You Don’t Inherit Tax Liability 

If you plan to buy an existing business, be sure to get a Certificate of No Tax Due. Failing to do so makes you, the purchaser, liable for any past due state taxes or fees, plus any interest and penalties that are owed by the business.

CBB will assist a buyer in obtaining this certificate prior to closing the sale of a business.

Read complete information from the Texas Comptroller of Public Accounts.

Protecting yourself from tax liability is a critical step in the closing process, but it’s only relevant once you’ve actually found a business worth buying. Before you get anywhere near a Certificate of No Tax Due, there’s foundational work to do.

To set yourself up for success, you must take a hard, honest look at your finances, skills, and lifestyle goals. This will help steer you toward opportunities that actually fit and away from the wrong ones before you ever get to the closing table.

Self-Assessment is Important Before Searching for a Business to Buy

Why is self-assessment important?

Not only is the acquisition of a business one of the most important financial decisions you will ever make, but it is also quite often a major lifestyle change. 

While there is certainly no requirement that your personal interests conform to your business purchase, a thorough and realistic assessment of your personal interests may help to minimize the risk of acquiring a business that may quickly become monotonous or uninteresting to you.

For those individuals who do not have firm ideas of what type of business they might be interested in or would be suited for, a list for personal consideration shown below may help bring your thoughts into focus.

It would be unlikely to find all of your ideal options and conditions embodied in one, single business. 

For practical purposes, however, you may choose to trade off the negative aspects of a low status business for the benefits of high income potential or trade off your reluctance to work on weekends for the opportunity to travel. 

The important thing is to give clear consideration to each option and condition as you analyze each business opportunity.

Self-Assessment: A List of Things to Consider

1. Take an inventory of your financial resources. 

You should identify the actual availability of all financial resources in the following categories:

• Actual liquid funds (cash) available for a down payment.
• Actual liquid funds (cash) on reserve for transition expenses, start up costs, working capital, business charges, learning curve
• Other current sources of income expected to continue into the future
• Future (anticipated) funds to be received
• Unencumbered assets available as collateral, notes receivable which could be factored, real estate
• Other sources of financing including business partners, relatives, friends
• Retirement funds such as 401K and pension funds that qualify for tax free benefits

2. Examine your resume and work history. 

Construct a “red lined” version that very accurately reveals your actual skills, work experience and extent of business knowledge. It should be used as a reference as you consider different business opportunities. Additionally, it can be extremely useful in enabling a business broker (or other professional advisor) to direct you toward the business most suitable to your background.

3. Examine your talents and skills 

Hobbies, interests, talents, and skills are a good source of inspiration for the types of businesses you might enjoy and in which you may have some knowledge.

 4. Do you want to be an Absentee Owner or run the business yourself? 

Do you intend to operate the business with a manager? This may be important to you if you have a limited amount of time available to personally operate the business. Remember, not all businesses “lend themselves” to absentee-ownership conditions.

 5. Have you carefully determined your minimum income requirements? 

Do you need a fixed amount of earnings every month from the business? Do you need to pull money out immediately or can you wait six months or a year before making any withdrawals?

 6. Do you want to manage a staff or prefer non-personnel intensive work? 

Do you consider yourself a “people person?” Some people shun or fear taking management responsibilities. Do you enjoy (and are you comfortable) supervising and motivating others? If not, consider businesses which are not labor intensive.

 7. How much importance do you place on high growth or expansion? 

Are you very concerned about operating a business that has full potential to grow and continue expanding into the future? Or, would you be satisfied to maintain a business at its current level of operation?

8. How important is High Status or Unpretentiousness of the business? 

Is it important that you own a business that has a name, product, service or asset base which will project a certain image? Or, would you be happy with an unpretentious business as long as it was profitable and met all of your other requirements?

9. Do you require time freedom or have issues about the kinds of hours involved in the business you choose? 

Is it important that you own a business which allows you to “come and go” as you please? Or, would you be satisfied with a business that required fixed hours? If time freedom is really important, avoid a franchise business that requires owner-involvement and specified hours of operation, as well as certain retail businesses which require that the owner be available to serve the customers.

10.  Will your family be involved? 

Is it important that you own a business where you can employ other family members? Are you wanting to create a certain number of jobs for your family members or close friends? Do your family members really have the needed skills and qualifications to help you succeed with the business? Are they willing to make the same sacrifices you are making?

11.  Does it matter if the business has travel requirements or do you prefer not to travel?

This is another vital component to consider when you’re buying a business. You don’t want to be surprised to learn that extensive travel would be involved.

12.  Do you want a business in which you would need some or a substantial amount of training? 

Are you willing to learn new skills, new business “buzz words,” new techniques and procedures? Or, is it very important that your business be one with which you are already quite knowledgeable and experienced?

13.  Is it important that your business does not require your personal involvement on weekends? 

If so, does the business have dependable employees capable of handling weekend operations without your supervision?

14.  Are you a morning or night person? 

Do you like to retire early in the evening and wake up early in the morning? How important is it to you that the demands of the business not disrupt your present lifestyle?

CBB: 50 Years of Proven Results From a Team You Can Trust

Our team brings a combined 230+ years of experience to the table, having closed transactions representing more than $1 billion in revenue. We have seamlessly guided thousands of business owners toward success when they are making some of the biggest financial decisions in their lives. 

See how we can help you. Contact us for a consultation.