Is This A Good Buy? How To Evaluate a Purchase Opportunity

So you want to buy a business — maybe you aren’t a business owner but you’d like to be, or maybe you already own a business and want to use this acquisition to expand your market, acquire talent, or vertically integrate your supply chain.

In any case, buying a business is not to be taken lightly. There’s a lot of research to do ahead of time, and it pays to have a team of experts look over the various terms of the deal before you decide anything. Your accountants, attorneys, and business advisors should all weigh in.

Here at Iron Wheel Solutions, we have decades of collective experience negotiating business deals of all types and sizes, and we’re happy to sit down over a cup of coffee and start with the basics. But that doesn’t mean you have to come in blind — here are a few questions to consider before you get too deep into negotiations.

Why Are They Selling?

This is a big one. Why does the current owner want out? Maybe they’re getting up to retirement age, maybe they just don’t feel inspired by the business anymore, or maybe there’s something rotten under the surface.

No matter what they are, those problems and concerns are about to become your problems and concerns. That doesn’t mean that business issues should stop you from buying a business, it just means you need to be diligent about your research.

Maybe the business is faltering because the previous owner didn’t put any money into marketing, but you’re confident that with good marketing, you can turn it around. Maybe they’ve had trouble with suppliers, but you already have suppliers that can take over another location without any trouble. 

Due diligence should turn the exact nature of any problems, but it’s also a good idea to just ask the previous owner why they’re selling. You don’t want to inherit a failing business you can’t fix.

Is the Business in Sound Financial Shape?

This is where a business broker can really help you dig into the other business’ finances. It’s hard to know exactly what to look for, especially if you haven’t been a business owner before, but experienced brokers will know exactly what numbers and files a business should have been keeping.

You’ll want to know if the business has kept detailed, audited year-end financial statements. You should review the most recent statements to get a handle on revenues and expenses. Make sure that the business’ tax returns are correctly filed and stored for the last five years at least.

Have You Seen Copies of the Business’ Contracts?

No business is an island — any business you buy will have SaaS subscriptions, vendor contracts, distributor contracts, and dozens of other legal agreements that the business will still be legally bound to even after you buy it.

Don’t get blindsided by obligations or expenses that you didn’t see coming — make sure you have a copy of every contract, including the length of the arrangement before you take it onboard yourself. Going over financial statements will help you find monthly and yearly expenses, but the amount itself isn’t enough — you need to know the terms of the contract, non-compete clauses, termination terms, and the rest of the details first.

Does the Business Have Any Legal Concerns?

We’re not just talking about legal contracts, though those are important. Has the business ever been sued, or are they currently involved in a lawsuit? What is or was the lawsuit about? Did it go to court, or was it settled?

Equally important are potential lawsuits. Have there been complaints to HR that might eventually turn into lawsuits? Was anyone fired recently that might come back and sue for wrongful termination? Are any of the business’ debts past due, or is there potential that a breach-of-contract case might rear its head? If the business gets sued after you acquire it, it’ll be yours to deal with — it’s best to know what might be around the corner.

What Do the Business’ Customers Look Like?

Is one customer responsible for a large portion of the business’ sales volume? If so, would the business survive without that customer? How big is the market of potential customers in your area, and has the business effectively reached them or is there room for growth?

Remember, when you take on a new business, you’re taking on their customers too. It’s worth looking into how much time the business spends on outreach, customer success, customer service, and customer acquisition to see how sustainable their current business model is.

The Bottom Line

There are dozens more questions you could ask about a business before you take it on — intellectual property, exclusivity deals, seasonality of business, the state of the competition, equipment needs, inventory, and so on and so on.

The upshot is that buying a business is complicated, and you shouldn’t go it alone. Give us a call and we’ll arrange a meeting over a cup of coffee. We have a team of highly experienced business brokerage experts who will help you do the research you need to make an informed, educated decision. 

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