Buying a Business? Make Sure It Checks The Boxes On This Checklist Before You Pull The Trigger. Every business opportunity comes with its share of drawbacks and risks. Your task is to identify these issues, understand them and determine if you can work with or solve them.
By Andrew Cagnetta Edited by Maria Bailey
Key Takeaways
- Here are the essential attributes to consider when deciding on a business purchase.
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Embarking on the journey of buying a business is an exciting and commendable resolution. However, often, I see buyers trying to find the perfect business. Spoiler alert! No such business exists, so flexibility is the key to achieving your entrepreneurial goal.
Every business opportunity comes with its share of drawbacks and risks. Your task is to identify these issues, understand them, and determine if you can work with or solve them. In this article, we'll delve deeper into the essential attributes to consider when deciding on a business purchase and hopefully solve some of the thought barriers for prospective entrepreneurs.
Related: Purchasing a Business Doesn't Have to Be Difficult. Here's Your Comprehensive Guide.
1. Income
Your goal should be to make money, so avoid buying a hobby or a business with a history of losses or one that barely gets by. Look for a business that offers a solid, provable, sustainable and potentially growing income stream. Analyze past income records closely to ensure their accuracy and reliability. And look for opportunities to grow the income in the future.
2. Longevity
Consider businesses that have stood the test of time, preferably operating for more than five to ten years. Established businesses with a history of success indicate strong customer loyalty. People, in general, hate change; therefore, business longevity can often ensure long-term repeat business.
3. Good books and records
A business that maintains accurate financial records can reduce the risk of buying something that may not perform in the future. Hopefully, your target has a computerized accounting system. That way, with due diligence and the assistance of a trusted CPA, it is easy to verify historical financial performance through accurate tax returns and clean financial reports. Note that if a business does not have good books, it could be an opportunity for a savvy buyer.
4. Recurring revenue
While recurring revenue is desirable, don't dismiss a business solely based on this criteria. Sometimes, companies that have one-time diverse customers can have the ability to change the business model and really grow quickly. If not, evaluate other critical factors mentioned here to make an informed decision, but don't let this be a deal breaker.
5. Long-term employees
Businesses with loyal and trained long-term employees are great assets for new buyers. Especially in a tight labor market. Navigating transition issues can be challenging, and having a dedicated team as part of the deal adds substantial value and often solves those issues. If you do purchase a business, be careful not to let go of employees too quickly. They may have more knowledge and expertise than you think.
6. Location, location, location
Consider the significance of the business's location and its impact on overall value. A good lease for a strategically located business is obviously essential. So make sure you have the terms and options to ensure your ability to stay in your leasehold and get a return on your investment. To reiterate, most customers like the routine of going to their "favorite spot." And for your own sanity, avoid long commutes. You'll be working a lot of hours, and an extended drive to work just adds to an often stressful day.
7. Established industry
Buying into an established industry with proven success is often preferable to launching new products or ideas. Aim to acquire businesses with a track record of profitability within an established market. Gaining market share is easier than shaping a new market or trying to sell new ideas to consumers.
8. Strong gross margins
Seek businesses with strong gross margins, as slim margins can vanish quickly. Finding a business that can create value beyond price is crucial for sustainable profitability. And having strong gross margins can often make up for mistakes made along the way.
9. Upside Potential
Prioritize businesses with growth potential through marketing, networking and outside sales. Avoid businesses that rely solely on location-specific traffic, as they may have limited room for expansion. Hard work and persistence can help you expand a business that may have been neglected.
10. Solid business model
Distinguish between a real business and a passing fad. Franchises, with their proven success and established business models, can be a safer option for those unsure about an individual business's stability. Wild new trendy products, responses to crises, and other rocketing new business ideas often turn into duds.
11. Skill set necessary to run the business
Choose businesses that align with your existing skill set or are easy to learn. The business should thrive on your talents, allowing you to leverage your expertise for success. And if you are lacking in a certain skill, make sure you can readily hire and afford the staff to fill in the gaps.
12. Competition
While not a deal-breaker, assess the competitive landscape to understand potential challenges. Be aware of any emerging category-dominating apps or major players entering the market. There will always be room for small businesses in any industry, but you don't want to be there while an industry goes through a seismic change.
13. Diverse customer base
Mitigate risk by selecting a business with a diverse customer base. Relying on a single large customer poses a significant risk, so opt for a business that caters to a broad range of customers. And if there is a customer concentration issue, work to eventually broaden your sales channels.
14. Retiring ownership
Prefer businesses where the owner is genuinely retiring, eliminating the risk of competition from the former owner. Retiring owners are more likely to facilitate a smooth transition for new ownership.
Related: 8 Legal Requirements When You Start A Business
15. Legal and regulatory compliance
Ensure the business adheres to all relevant legal and regulatory requirements. Fines and legal issues can be quite expensive and lead to un-repairable reputational damage. Thoroughly review the business's compliance history and seek legal advice if necessary.
16. Technology integration
Evaluate the business's use of technology and its integration into daily operations. A modern and efficient technological infrastructure can enhance productivity and competitiveness. Note again this could be an opportunity if the business is now lacking technological infrastructure.
17. Social media presence
In today's digital age, a strong social media presence is crucial for business success. Assess the business's social media accounts, online reviews, and overall digital reputation. Note if there are any issues currently, and make sure you get access and ownership immediately upon sale.
18. Marketing strategies
Examine the effectiveness of the current marketing strategies employed by the business. A well-developed and targeted marketing plan can significantly impact customer acquisition and retention. This is often a place where new owners can excel.
19. Employee training programs
Investigate whether the business has solid employee training programs in place. Well-trained employees contribute to better customer service, operational efficiency, and overall business success.
20. Financial flexibility and strength
Evaluate the business's financial flexibility, including available credit lines, cash reserves and financial partnerships. A business with a strong balance sheet and available credit is better equipped to navigate economic downturns and seize growth opportunities.
While it's unlikely for a business to possess all these traits, even one can set you on the path to successful ownership. This guide aims to assist you in selecting a business that aligns with your goals and proves to be a rewarding venture. Best of luck on your journey to entrepreneurship!
This extended guide incorporates additional crucial considerations for aspiring entrepreneurs looking to purchase a business, ensuring a more comprehensive and informed decision-making process.
