5 Questions to Ask When Thinking About Buying a Business
Over my decades of practicing business law, I have assisted with many business acquisitions and transactions.
Along the way, I have helped dozens of clients and budding entrepreneurs acquire their first businesses. In most cases, I also helped the client identify the acquisition opportunity.
I list below a few questions I have for anyone looking to buy a business:
- Why are you looking to buy a business?
Many who work for other people hate their jobs or hate their bosses or both. But this is not a sufficient reason to buy a business.
I don’t think it makes sense to buy a business unless you feel you have both the relevant skills and a genuine passion to own and operate your chosen business. Nothing less will do.
A desire to make more money than you currently earn is also not an adequate or sufficient reason to buy a business. Almost all of the clients I have helped buy a business had a higher after-tax income with their new businesses than they would have working for someone else. There is certainly no guarantee that this will be the case.
- What type of business are you looking to acquire and why?
Over the years, many people have come to me and have told me that they wanted to buy a business. Yet most had little to no idea what business – or even what type of business – they wanted to buy.
Most of these folks ultimately found a business to purchase and prospered with the acquired business. However, I don’t recommend that anyone set out to buy a business unless they have some idea of what type of business they might best understand and how they will add value to it. With that, perhaps having a genuine passion for the kind of business they want to buy.
- How do you propose to identify a suitable acquisition opportunity? In other words, how do you intend to find a business to buy?
I have heard that the rule of thumb is allow two years to find a business to buy.
Let’s face it, many of the people looking to buy a business have little to no experience finding businesses, so they face a very long learning curve. Most people who want to buy a business don’t want to pay a professional finder to do the scouting work because they plan to use whatever money they have to pay their bills while they do this work themselves. Frankly, they may have no idea what is involved and how ill-prepared they are to search for business opportunities! Therefore, I recommend that the prospective buyer plan on the process taking two full years or else hire a professional business finder.
There are, of course, exceptions to the rule.
- Do you have sufficient resources and credit to afford the business you seek to acquire?
If you are going to set out to buy a business, you need to have enough money in the bank. Enough money is necessary to pay your bills while you search for the business to buy, typically for two years, and then to buy the business after you find it.
If you start down the road of buying a business without adequate resources, you will either be forced to halt the search process before you find a company to buy, or you will find a company but not be able to finance the acquisition.
I encourage prospective buyers to be realistic in assessing and determining whether they have adequate resources to make an acquisition.
- Are you and your family prepared to take the risks associated with business ownership?
If you plan to buy a business, you should plan to sign personally for loans or notes to be held by the seller or whoever provides you with financing.
In all likelihood, you may have to put up your house as collateral. This will require your spouse to cosign if you are married.
Not all people who buy businesses – not even all first-time buyers – will be made to sign personal guarantees. However, enough financings require a personal guarantee that you should not set out to buy a business unless you are willing to sign personally and undertake the associated risks.
For most of my business-acquirer clients, buying a business was likely the best thing to ever happen to them professionally, financially, and personally. But let’s never ignore the fact that there are risks involved in buying a business, and not every business acquisition is a home run for the buyer – even though it often seems that way.