Buying a business can be an exciting time for any entrepreneur, but it is very important for any potential business owner to do their due diligence before making a commitment. Often times, this involves the hiring of an outside consultant or a business broker who specializes in the small businesses business in order to give potential buyers an independent assessment of the opportunity available to them.
Usually, the potential buyers focuses solely on the financial aspects of the business, especially with respect to the interest rates paid on bank loans and any other business loan that was made when the seller was starting a business. However, anyone who is buying a business needs to take a broader view of the business in order to get a holistic view of the enterprise.
Any analysis must begin with a study of the industry within which the company competes. One thing that is particularly important is the amount of consolidation that is taking place in the industry. If a lot of companies are merging, it may suggest that the industry has economies of scale, implying that larger companies will be able to out-compete smaller companies. This may compel a business owner to a business loan to build up the company, possibly making it a somewhat riskier endeavor.
Small business sales can often cause disruptions with the major suppliers and service providers who support the company as it grows. Any potential buyers need to make sure that these logistic providers are on board with the new ownership; otherwise, the new business may become a lot more complicated than originally believed.
Similarly, the acquiring entrepreneur needs to find out what role the seller had in the business. Some people starting a business take a very active role in the running of the enterprise, something that can become very disruptive when that owner leaves for other pursuits. If this is indeed the case, the buyer may want to keep the seller around for a while to help with the transition. If the seller is not interest in doing that, make sure that you know all of his responsibilities before he leaves.
Although many business owners focus on sales and profits, it is important to focus on gross and net margins as well. A business with declining margins may need a cash infusion through a business loan. In this weak economy, it can be very difficult to get a loan for a business. Unless you can find a small businesses business that focuses on given a loan to business, the buyer may quick find themselves in a cash crunch.
Any buyer also needs to do his due diligence on the employees of the company. Employees are the lifeblood of a company, and success will be far more difficult if you can not keep key employees around after the acquisition. A buyer needs to determine the loyalty of the employees to the company as well as figuring out how difficult it will be to attract new talent.
Finally, if the seller is a younger business owner, the buyer needs to analyze the reasons why the business is up for sale. Although the business broker may give you a plausible explanation, a buyer needs to do his own investigation into this matter. This is very important, because there is always the possibility that the business is not doing well. If you end up buying a declining business, you will be scrambling for bank loans or some business loan to make ends meet, thereby crushing yourself with interest payments in the process.
Although there are certainly more things to consider when buying a business, the following considerations give you a starting framework within which to start your investigation. This due diligence will be especially important if you want to raise additional funds by getting a loan for a business to grow the company. Any financial institution that may provide a loan to business will make sure that you have done your homework before they part with their money.
Bill Whitehurst has been engaged as a Texas business broker for the past 15 years and has over 100 successfully closed transactions.