Starting your own business from scratch up requires hard work. The risks and uncertainties are also high. That’s why competent entrepreneurs prefer to buy an established entity.
However, even when purchasing an established business for sale, there are some risks involved. If you don’t do your due diligence, you may buy a failing business. As such, you need to know what to avoid and what to look for.
With that in mind, the following are some key areas you need to consider before sealing the deal.
- Political and Demographic Changes
Businesses don’t operate in a vacuum. As such, if you notice that if many owners are selling their businesses in the same area, there is a valid reason. Until you identify this reason and evaluate its practicality, you are poised for failure.
You’ll need to check the population trends in the area you are looking to buy your business. If, for example, you are looking to buy a business for sale in Miami, make sure that you are aware of the massive population growth rate of 3.28%. An increase in population will mean a higher customer base for your business.
Once you are certain that the population changes won’t affect your business, assess the legal requirements of operating the business. Is the government enacting zoning laws that will prohibit your enterprise in any given area?
You need to have answers to all of this information before you decide on a location for your business. Otherwise you may realize that the business climate is worse than you thought for reasons that are outside of your control, and you’ll be stuck with a business in a declining area.
- The Owner’s Discretionary Income
When negotiating for a better price, most people focus on sales and revenue rates. This is wrong. You need to check the amount of money the business owner takes home after meeting all the costs and expenses of this entity.
Is the ODI declining? Has it been declining over the years? What could be the possible reasons? Don’t make any purchase agreement before determining the reasons for the decline.
However, these figures are at the discretion of the business owner. As such, they may falsify them in the hope that they’ll force you to quote a higher price. The easiest way out of this is making observations for this figure for some months before agreeing on the purchase price. This is the best way for to value the business.
Beware of the owner who gives flimsy excuses to convince you that his ODI is higher than what is reported. If they are understating their earnings to reduce the taxable income, there is also a high chance that they’re not honest.
- Location of Your Competitor
If you intend to buy a retail store, chances are high there is a service business somewhere that may throw you out of business if they venture in your town. So, you’ll need to assess where the business is located, especially its nearest outlet.
You don’t want them to come and run you out of business two years after the purchase.
- Business Reputation in the Area
Don’t rely on what the owner says. Get yourself out there and confirm these statements yourself. Check whether the business has been actively participating in community affairs or not.
You may also visit the local police station to determine whether there are frequent complaints against this business or its owners.
Only purchase a business with a good reputation. Otherwise, you may end up with a community that is not