When you buy an existing business you are buying the employees, the customer base, products and/or services. If you find a business for sale, you need to consider the following:
- type of business, are you interested in this type of business? Will you be happy in it day after day?
- legal structure of business, incorporated, unincorporated, partnership, joint venture
- hours required to work
- Remember, when you start your own business, you may only work half days, sometimes it is the first 12 hours in the day, sometimes the second 12 hours. Either way, it is only working half a day.
- One a more serious note, you may need to research your competitors, look at the market potential for this business, will you be able to grow it or has it reached a maximum level. If you cannot expand the revenue i.e. a coffee shop franchise has only a limited number of potential customers, are you buying a business or a job? Are you happy if it is only the later?
- what are the reasons for the sale?
- If you are buying a restaurant in an office building, what is the occupancy of the building? Are any major tenants about to move out which would affect the sales of the restaurant. I saw in one office building 3 major tenants move out and the building was only 50% occupied. The tenants who moved out were paying the rent so from the landlord the building was 100% leased but there were few tenants in the building. As a result, the restaurant traffic dropped dramatically and the owner was trying to sell the restaurant to an unsuspecting buyer who may not ask the right questions. In the end, the master franchisor took back the restaurant for the third time. If three previous people have owned the business and all have failed, do you not think that there is a problem with the location?
- How much time is left in the lease. Do you need to renegotiate it? If the new lease rate goes up significantly, should that impact the purchase price since the company will now have higher expenses?
- Look at the financial statements and the internal financial statements for the last 3 years. Since the economy is changing, look at the sales on a month by month basis for the last 12 months and compare against prior years sales for the same month. are the sales dropping, if so, by how much? Should that impact the valuation of the business for sale?