Purchasing an existing business can be a savvy move if you do your homework. While starting a company from scratch involves creating a business plan, mission statement, website, and figuring out how to get funding and whether you need a physical workspace, a lot of that hard work has been done by someone else when you buy an existing business. When you step in, you can spend your time and energy on the bigger picture without getting bogged down by a thousand little decisions.
But purchasing an existing business requires preparation in order to make it a successful move. Here's what you need to consider before buying an existing business.
How much can I change when I acquire the business?
Being flexible is key when purchasing an existing business. While the temptation might be to go in and immediately change the business to your own preferences, being successful after acquiring an existing company takes patience. You don't want to cause a panic by barging in and overhauling.
According to Sander Tamm, founder, and CEO of E-Student, a resource for online learning, you shouldn't modify everything at once. "Rebranding will take time," Tamm says. "You have to interact with an already established customer base. The processes and the brand may be so strongly established already that it may be difficult to make it your own."
In fact, when you buy an existing business instead of starting one from scratch, you could be building onto a successful structure. This means that it might not even be in your best interest to overhaul the business. Daivat Dholakia, director of operations for Force by Mojio, an online GPS fleet tracking company, believes that purchasing an existing business means having a roadmap for building out projects.
Building onto an existing business also reduces uncertainty. "While some people are worried that buying an existing business comes with a lack of control over the structure and model, it reduces the uncertainty of how much revenue it'll bring in," Dholakia says.
Why is this business for sale?
There are several legitimate reasons why a successful business might be for sale: The owners could be relocating, retiring, or looking to scale back on their workload. But in order to fully assess the long-term success of an existing business, you should hire an outside party to evaluate the company's finances. Andrey Doichev, founder of Inc and Go, an online business formation resource for entrepreneurs, says, "An accountant who is independent of the business must assess the financial records to ensure that everything has been done legally and with diligence so you can avoid any potential trouble with taxes or collections."
In addition to financial records, you'll want to evaluate any potential issues with employees and/or customers as these can also affect a smooth transition between owners. Harriet Chan, co-founder and marketing director of Cocofinder, an online background checker engaged in software development, suggests reviewing documents related to employees and customers. According to Chan, "Other essential items for reviewing are employee contracts, environmental audits, income tax returns for the last three years, customer information, and a schedule of the company's insurance claims and litigation history."
Do I need to hire a business broker?
Business brokers work for both buyers and sellers during the sale of existing businesses. While some argue that business brokers are more beneficial for sellers, there are advantages to using one as a buyer. Dholakia says that you should use a broker in addition to a lawyer and a financial professional. "The broker will help assess whether the business is a fit for your capital and loans, your interests, and your financial expectations," he says.
According to Doichev, not only will a business broker know the details and processes to follow, but they may also open up opportunities for you to purchase other businesses. "They are experienced professionals who will know which red flags to look out for, and if the business you intended to purchase isn't viable, they likely have a network to help you find an alternative business for sale," he says. Doichev also recommends finding a "package deal" of professionals that includes an attorney and accountant, so you don't have to coordinate several different parties.
Buying an existing business can be a great path toward financial freedom. Just make sure that you do your research and consult with professionals who can help you make an informed and successful purchase.
