Buying a Business

4 Tips to Follow Before Buying a Business

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Buying a business is an exciting proposition. It can be very lucrative or it can lead to financial disaster.

Ensure your success by following the tips below.

1. Understand why the current owner wants to sell.

Just after a group of Richmond, Va.-based entrepreneurs purchased AMF Bowling, the sport’s popularity in the U.S. increased significantly. This was followed by an expansion of the sport in Europe and then in Asia. With growth largely tapped out in all worldwide markets, the entrepreneurs sold the business for about $1 billion more than they had paid for it.

Related: 8 Factors That Determine the Financial Health of a Business

Within a relatively short period after the sale, AMF Bowling filed for bankruptcy protection. The new owner didn’t understand that the worldwide expansion in bowling had reached a peak and that sales in the bowling equipment industry were about to decline precipitously.

If you are going to buy a business, make sure you understand why the current owner wants to sell. Does he or she see troubled times in the future or is there some other legitimate reason for the sale?

2. Learn as much about the industry as you can.

Make sure you understand the competitive landscape. Are there new or pending regulations that will affect industry profitability? If the business has been very profitable, are there barriers to entry that will prevent others from entering the industry and competing for most of the profit? Are there barriers to exit that will keep competitors in the industry even if they are unprofitable? Where is the power in the channel? Will suppliers and/or customers squeeze profits out of the industry? What will happen to demand for the product or service in the future?

Related: A Glitter Bomb? 3 Critical Questions the Buyer of ShipYourEnemiesGlitter Should Have Asked.

3. Make sure you can answer the first question every business must answer.

That question is, why should a prospective customer buy this business’s product or service rather than a competitors'? If you can’t answer this question, it is unlikely that prospective customers will be able to answer it.

Perhaps the best situation is one where you can answer this question in an aspirational way. That is, you can envision an answer to this question that the business doesn’t currently exhibit, but you can see a clear path to developing this capability.

4. Have a plan to improve the business.

Presumably, the current owner of the business understands its value. There is no reason to believe that the owner would accept less than full value for his or her business as it has been run. Therefore, the purchase will be a good deal for you only if you can run the business better than it has been run.

Perhaps you already own a business that will have synergy with the proposed acquisition. Maybe you know how to cut costs or grow sales significantly. Whatever the case, if you can’t figure out how to run the business better than it is currently being run, you are unlikely to be happy with the acquisition.

Buying a business can be very rewarding, or it can be a nightmare. Following the four tips above will help to ensure that your venture lands on the positive side of the ledger.

Related: What to Ask When Evaluating a Business for Sale