Buying an Existing Business

The decision to buy an existing business may be one of the most important decisions you will ever make, so don't rush into it. Take time to obtain as much information about the business as possible.

The only true method of evaluating the worth of a business (and the price you are willing to pay for it) is to review its financial records (for at least the previous three years) and then ascertain its profit potential. Carefully review the company's balance sheets, income statements, tax returns, sales and purchase orders, and bank deposits.

You should never buy a business without consulting with a lawyer and an accountant. Written agreements should cover all necessary aspects, including what assets are to be purchased, what liabilities are to be assumed, and when the sale will be complete.

Before buying a business, consider the following:

1. Why is the present owner selling the business?
2. What kind of reputation does the business currently have in the marketplace? What "good will" does it have?
3. Is the present owner planning to open a new business in direct competition with you?
4. Did the present owner make it easy, or difficult, for you to look at the company's financial records? Who prepared the financial statements? Have they been audited?
5. Have company sales and net profits been increasing or decreasing?
6. Is the market for the company's product or service increasing or decreasing?
7. Is the type and size of the business compatible with your interests, talents, and personality?
8. Can you adequately finance both the purchase of the business and the day-to-day operations?
9. What is the market value and the replacement value of the company's tangible assets, including inventory, furniture, building, land leases, and accounts receivable?
10. How collectable are the accounts receivable? (The older they are, the less likely that they can be collected.)
11. What is the value of intangible assets, such as company reputation and image, customer lists, relations with suppliers, trademarks and copyrights, skilled personnel?
12. What company liabilities, including liens, mortgages, unpaid bills,and back taxes, will you be responsible for?
13. Are current employees effective and efficient in their jobs, and what is the state of employer- employee relations?
14. Will the projected return on your investment and hard work be worth it, or would you be better off finding another way to invest your money and your time?

This is by no means an exhaustive list of questions. For more advice and information on buying a business, call any branch office of ED&T.