Buying a business with a strong financial and operational track record is no guarantee that you will experience similar success as the new owner of the business. In a small to medium-sized business, those results are often a record of what the previous owner did and may be only a possible indicator of how you will perform in the business. By way of example, if you have no experience in hospitality you may not want to purchase a hospitality business, or buy an engineering service if you have no engineering background just because it was profitable for the previous owner. Below are some suggestions to help you successfully locate a business that suits your background, skills and desires.
- Choose a business where you have an advantage by way of qualifications, or experience. Business these days is generally highly competitive, and you need to be at least as good as your opposition, to stay in business.
- Choose an occupation that you enjoy. Small business often involves long hours, and requires great enthusiasm to motivate staff, and deal successfully with clients. This can become very tedious if you are not happy at it.
- Check the seller’s reason for selling. There are many legitimate reasons for selling a perfectly good business, such as retirement, marriage or partnership difficulties, health issues, other business interests, or even just simple “burn-out.” But sometimes, there can be a more sinister reason, such as impending problems with a lease, technology changes, new competition, demographic or infrastructure changes, obsolescence, impending major capital outlays – the list is infinite. This is where it could be advantageous to have someone experienced working on your side. Every business has its problems; the trick is to know what they are, and have a strategy for dealing with them.
- Understand clearly the nature of the business, and how much capital is required to run it. In addition to the cost of purchasing the business, you need to have sufficient capital to finance inventory, accounts receivable and overhead costs. Working capital requirements differ substantially between retail, wholesale and manufacturing companies.
- Understand the cash flow characteristics and any seasonality of the business. A year-end profit does not necessarily mean that there will be cash available at critical times to meet necessary costs, such as interest, taxes, and your living expenses.
- Ensure that you have the means to purchase, and operate the business, and fund any planned growth or development of the business.
- Try to get to know the seller, to gauge whether you can successfully “fit into their shoes” and run the business at least as well as they did.
- Try to meet the key employees to make sure they intend to stay, and that there will be no major personality clashes. In many cases, sellers will not want you to talk to the staff until negotiations are at a fairly advanced stage. If this is the case, you may wish to include appropriate provisions in the purchase agreement.
- Avoid major changes to the business during the transition period, unless you are very sure of what you are doing. A smooth changeover with minimum customer impact is the usual road to success.