1. Money

How to Buy a Business

Part 1: How to Buy a Business, Not a Lemon

By

If you know how to buy a business, buying an existing business can be a great opportunity to get into business without going through the process of starting from scratch. If you buy a turnkey operation, you can skip the startup phase entirely and begin operations as soon as the sale is complete; everything is already set up and ready to go.

But unfortunately, businesses for sale are like used cars; there are lots of them out there, but some of them are lemons. To avoid getting stuck with a bad bargain, you need to fully investigate the business you’re thinking of buying before you buy a business.

How to Buy a Business in 8 Steps

To make sure you're getting a good deal rather than a bad bargain, follow these steps:

Step #1) Find out if it's been in an accident.

In other words, before you buy a business, discover the real reason the business is for sale. And don't just take the seller's word for this. Sure, people do retire or become ill, but the real reason may be anything from a big-box retailer moving into town through losing a lucrative, traffic-driving contract such as being a postal outlet. Discover the true reason(s) the business is for sale by talking to people who are familiar with the history of the business you're thinking of buying, such as local realtors, other business people and suppliers.

Step #2) Find out what's included in the asking price.

Find out what's actually for sale and what method of business valuation is being used. If you buy a business, what assets are you actually getting? People selling businesses usually have a spec sheet prepared, listing the assets involved and offering an estimate of their value. Ask for details if anything is unclear. And be sure to find out if the assets listed are free and clear of debts and liens; you don’t want to buy other people’s problems.

Pay special attention to any intangible assets that may be listed, such as goodwill. Sellers tend to inflate the value of this, thinking perhaps of the potential future value of their reputation and established customer base.

Step #3) Look under the hood.

Remember the old joke about the guy who bought the good looking car only to discover he couldn't drive it away because it had no engine? It's only funny when it happens to someone else.

Before you buy a business, study the business's past performance. Ask for and examine the last three years of the business's financial statements. (If you don't have training in analyzing financial statements yourself, have a professional, such as an accountant, review the financial statements. Learn how to Find a Good Accountant.) You will also want to know who prepared this financial data; were they prepared by the management of the business, for instance, or by an accountant?

If by an accountant, documents should accompany the financial statements that will explain the depth of the accountant's review. An Auditor's Report, for instance, certifies that a full review has been conducted, while a Review Engagement Report will present the findings of a limited review of the business. A Notice to Reader signifies that the accountant prepared the financial statements based on information provided by the business without conducting any checks.

Don't like what you're seeing or just not seeing enough of it? Ask the seller for permission to see the actual business records and get your own audit done.

Read more about how to buy a business on the next page of this article...

Related Video
Adam Gerber on advertising business models

©2014 About.com. All rights reserved.