Q: My husband and I are thinking about buying a business. The ad reads: "Cafe/bookstore: Beautifully renovated historic building, patio, view of waterfalls. Solid, manageable inventory with excellent customer base. Building and business for sale by original owners of six years." What are the key things to find out and what should we be looking for before we buy?
A: I like your thinking. You don't need to be an innovator to be a successful entrepreneur. Many entrepreneurs are great turnaround artists-they have far more success recognizing an opportunity and capitalizing on an existing venture than if they had started from scratch. When you create a business, you really never know what will happen, whereas the bonus when buying an existing business is that you can do enough research into the history of the enterprise to know fairly accurately what to expect. As a result, buying an ongoing business is less risky than starting a brand new business.
The key to a successful business purchase is to dig into the business' records and history. If it's true that the past is a prologue to the future, then knowing what's happened in the venture will tell you where it's headed. Here are a few things you to take a look at:
The physical location. How long has the business been in that location? If the store has been operating in the same place for many years, that's obviously a good sign. Conversely, if other businesses have failed in that location, you should be concerned. Some locations get a bad reputation in the neighborhood, and you should probably avoid those businesses. You also want to be sure that the place is convenient for customers, has adequate traffic flow, is up to code, has adequate signage and doesn't need a lot of remodeling. Finally, you need to see where your competition is located in relation to the business. If a Barnes & Noble is open down the street, that's a red flag.
Profits and losses. You're buying an ongoing business presumably because you want an accurate idea of what your profit will be. To figure this out, you need to obtain from the proprietor the past five years' worth of audited balance sheets, income statements and cash flow statements. Your accountant should review these. You need a copy of the lease and any other contracts you'll be responsible for. You also need a list of assets and liabilities, receivables and obligations, and five years' worth of tax returns. The upshot: You need all records as they relate to the business, and you need to spend adequate time analyzing these records with your team.
People. You'll be taking on not only a business but the staff, too. Review their personnel files, and meet with them individually. Find out if any have employment contracts that may prevent you from letting them go for any reason. You also need to speak with some of the business' customers. Discover what they think of the business, how they like it and how long they've patronized it. That alone will tell you a lot.
Finally, make sure the owner is someone you can work with. He or she should disclose all financial, legal, personnel and customer information as it relates to the business. If he or she refuses, there's a problem.
Steven D. Strauss is a nationally recognized lawyer, author and commentator. He is the author of the Ask a Lawyer(W.W. Norton & Co.) series of legal advice books geared toward the layman. He is also the author of The Unofficial Guide to Home-Based Businesses and is a business columnist for USA Today.com.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.