Starting a business can be incredibly rewarding, but roughly half of all new businesses fail within their first five years. Purchasing an existing business can help you avoid some of that risk while maintaining control over day to day operations and overall strategy. Once you’ve confirmed how you’ll fund the purchase – check out options like business loans for minority-owned organizations – be sure to do your due diligence before finalizing the purchase.
This article will cover some of the most important things to keep in mind when determining whether or not to purchase a business. It’s critical to look for these red flags before making a final decision—you don’t want to run into any unexpected problems later on.
Why Are They Selling?
There are obviously legitimate reasons to want to sell a business, but owners often try to sell when they lose confidence in the company’s future. Learn about the current owner on a personal level and get a better idea of why they want to move on from the business.
The seller will also be your best resource for information about the company, so don’t be afraid to ask questions and request advice when necessary. A good relationship with the previous owner can go a long way toward your future success.
Cash Flow
Small businesses often take time to turn a profit, but buying an unprofitable company is far more risky. If you have access to any financial information, try to figure out whether they’re still losing money. Things will be that much easier if the business is already succeeding when you take over.
Similarly, you should do some research to identify any debts that could affect cash flow in the future. It’s critical to have a comprehensive understanding of the company’s financial situation and long-term outlook. A business that’s struggling to pay back debts may not be a good investment.
Employees
If you’re planning to take an active role in management, you need to develop positive relationships with employees at all levels. Employee engagement is associated with a variety of benefits including reduced turnover, increased productivity, better customer retention, and more.
You can also take this opportunity to ask employees for candid feedback about their work environment and the state of the company. Auditing each employee’s workload and performance will help you make personnel decisions after acquiring the business.
Assets
Buying, maintaining, and replacing assets can be a major cost for many businesses. Companies with decent cash flow may have deteriorating or outdated assets that need to be replaced. You should keep these costs in mind now rather than letting them take you by surprise after the purchase.
Buying a company comes with its own pros and cons, and it’s important to learn as much as you can upfront. These are just a few of the top factors to consider throughout the buying process as you look for red flags and get an idea of how you want to run the business.
Guest post courtesy of Luke Hayward
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