An Acquired Taste
Before you buy that business, don't just give it a once-over--put it under the microscope.
Are you considering buying an existing business? Whether you use
a business broker or go it alone, you will definitely want to put
together an "acquisition team"--your banker, accountant
and attorney--to help you. These advisors are essential to what is
called "due diligence," which means reviewing and
verifying all the relevant information about the business you are
considering.
The preliminary analysis starts with some basic questions. Why
is this business for sale? What is the general perception of the
industry and the particular business, and what is the outlook for
the future? Does-or can-the business control enough market share to
stay profitable? Are the needed raw materials in abundant supply?
How have the company's product or service lines changed over
time?
You also need to assess the company's reputation and the
strength of its business relationships. Talk to existing customers,
suppliers and vendors about their relationships with the business.
Contact the Better Business Bureau, industry associations, and
licensing and credit-reporting agencies to make sure there are no
complaints against the business.
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If the business still looks promising, your acquisition team
should start examining the business's potential returns and
asking price. Your assessment of the business's value should
take into account issues such as the business's financial
health, its earnings history and growth potential, and its
intangible assets (for example, brand name and market
position).
In addition, get a good idea of the company's anticipated
returns and future financial needs by asking the business owner to
show you projected financial statements. Balance sheets, income
statements, cash-flow statements, footnotes and tax returns for the
past three years are all key indicators of a business's health.
These documents will help you do some financial analyses that will
spotlight any underlying problems as well as give you a closer look
at a wide range of less tangible information.
Excerpted from Start Your Own Business: The Only Start-Up
Book You'll Ever Need (Entrepreneur Press)