Before you buy an established company, conduct preliminary research including a thorough interview with the seller to establish that the investment is profitable and worth your while. A solid background on the business not only shields you from making a mistake but can also ensure you negotiate the best deal based on prevailing circumstances. More importantly, find out the core business drivers -- the factors that are contributing to the current business performance and whether it's stable and likely to improve.
Reason for Sale
It's important to establish why the business is for sale. Whether it's divorce, retirement, relocation, inability to run the business due to an illness or some other answer, how motivated the owner is to sell can play a significant part in the price you pay. However, as you keep probing, be on guard for inconsistencies in the owner's narrative. The answer or explanation could be camouflaging the real reason, which may be directly linked to the performance of the business, such as diminished clientele or brand issues.
Skeletons in the Closet
As far as is practically possible, find out any issues that may potentially drag down your operations in the long run. Find out if the business has ever been vandalized or been a crime scene and if the owner has any past, pending or potential litigation. Avoid inheriting a lawsuit that will bog you down later on by having the owner put it in writing that no legal matters are being concealed. Do your homework and find out whether the seller has had trouble with the state, government or the Internal Revenue Service. Establish if there are any zoning restrictions, easements, exclusive rights or right of ways that may impact business operations.
Cost of Investment
The quoted selling price for the business may just be the ballpark figure, masking other costs and fees you may incur prior to beginning operations. Although cash flow should typically cover payroll along with bills such as rent and utilities when the business picks up, you may need some capital outlay. Other than the initial investment -- the selling price -- ask the owner to elaborate on the amount of operating capital to cover any losses until the business reaches a break-even point, along with any ongoing fees, depending on your industry. Further, ask the seller about the skills or qualities needed to run the business effectively -- you may need to compensate the seller to remain involved for post-sale training and support for a period of time.
Revenue Stream and Competition
To properly project your profitability, ask to see the seller's financial statements for the past few years. Since you're buying an income stream, these numbers will assist you in strategizing how to pay your employees, conduct marketing and manage operations. Ask who the biggest competitors to the business are. Knowing your company's adversaries gives you an insight into what's happening in the marketplace and the possible opportunities to create a competitive advantage to increase sales and profits.