5 Important Factors Novice Entrepreneurs Must Consider Before Buying a Business Buying an existing business may help fast-track your entrepreneurial dreams. However, novice entrepreneurs should carefully evaluate this opportunity to avoid any potential pitfalls.
By Pierre Raymond Edited by Kara McIntyre
Key Takeaways
- There is rarely a time when business ownership is easy, and buying an existing business can prove to be just as difficult as building something from the ground up.
- As a new entrepreneur, you need to have a foolproof strategy that will allow you the necessary legroom to bring new ideas to the business, but continuously build upon the existing foundations to ensure the business can grow and you can reap the benefits of being a new business owner.
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Listen up entrepreneurs, it's time that we talk about the not-so one-size-fits-all experience of buying an existing business. From the outside, it may look easier to buy a business that is already up and running instead of doing all the groundwork yourself; however, numerous obstacles can stand between you and achieving success.
It's not completely novel for new entrepreneurs to side with a business partner or purchase a sizeable stake in a company, hoping to transform it into an empire; it's best to first address some of the unspoken rules of the game and to understand what you're getting yourself into before you can sign on the dotted line and claim your corner office.
Related: Why Start a Business When You Can Buy One? Here's What You Need to Know.
1. Business objectives
As someone who might be fairly new to the business of buying a business, it's best to consider and understand your business objectives before anything else. Consider the bigger picture — not just of the business you have in mind, but the type of leader you will need to become and how you will operate your newly purchased business.
Going into this without the right mindset can lead to costly mistakes. When you already know what you want to achieve over both the near and long term of being a business owner, you will begin to establish a forward-looking mindset that will help you not only understand the business landscape but also how your decisions will need to be adjusted to achieve your business goals.
If your idea is to use the business as a cash cow, you might find yourself running the business into the ground and walking away with nothing to show for it. Be clear about what you want to achieve as a business owner and thoroughly communicate this with your business partner or the person who you might be buying the business from.
2. The industry
Buying any business is not only about understanding the ins and outs of day-to-day activities, but learning the industry in which this business may operate.
Learning the industry will give you some clarity as to why an owner might be looking to sell their stake in the company. You might stumble across untapped opportunities or even realize that industry conditions are steadily on a downward trajectory.
More importantly, learning about the industry also allows you to learn more about the people you are likely to be working with. Remember, as an outsider, you will need to take reign over a company that already has an established network of employees, suppliers and customers. The more you understand how these all come together, the better you can prepare yourself for any unforeseen challenges.
Related: 6 Critical Steps for Buying a Business
3. Finances
Business ownership comes with a lot of consideration of finances, and as a newcomer, you will need to learn the ropes of how to assess the financial condition of a business before you can make an offer.
Understanding the financial history should be one of your top priorities. Learning how the business operates, where the majority of its revenue streams may be, how much debt it may be carrying and how income is distributed among all channels of the business will help a better picture of the overall health of the business.
Additionally, you will need to consider whether the company is up to date with its tax filings, whether owners have disclosed all available financial information and how they manage their financial accounts with their suppliers. There's a lot of paperwork to get through, and at this point, it's advised to bring onboard a financial advisor or accountant to help you work through everything and highlight any uncertainties.
4. Future opportunities
As an entrepreneur, buying an existing business requires you to plan for the future, not only in terms of financial prosperity but also to ensure that as the consumer landscape begins to change, your new business can adjust to these developments. Tapping into new opportunities will allow you to initiate a new direction in which the business can potentially grow.
Owning a business is more than just keeping the lights on and making sure employees are satisfied. While this is important, looking towards the future possibilities within the marketplace will help create new ideas. This could lead to new ways of resolving problems or finding ways to help grow the business and easily adjust to sudden changes that may occur in the consumer buying market.
Although you may only look at the current pace at which the business has grown over the last few years, consider how the coming years will influence the business objectives and how innovative decision-making can lead to new ideas and opportunities.
5. The underbelly
Finally, as part of buying an existing business, ask yourself "why." You may want to repeat this question several times before you can get the answer you're looking for.
Ask yourself why current owners might be selling the business, and what are some of the reasons they have shared with you and other prospective buyers. You can even ask yourself why you are considering buying this business and what your long-term objectives are.
Get to know the underbelly of the business, and seek out any unknown skeletons that might be hiding in the closet. The more you know about the business and the overarching "why" factor, the better picture you can paint for yourself before making an offer.
Related: 5 Reasons to Buy a Successful Business Instead of Starting a New One From Scratch
Final word
There is rarely a time when business ownership is easy, and buying an existing business can prove to be just as difficult as building something from the ground up. While it's possible to swing in this direction, as a new entrepreneur, you need to have a foolproof strategy that will allow you the necessary legroom to bring new ideas to the business, but continuously build upon the existing foundations to ensure the business can grow and you can reap the benefits of being a new business owner.
