Factors to Consider When Buying a Business

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When buying a business, research the business, consider how the purchase will be financed, and assess your own abilities as they relate to the business. Put together a business plan when buying a business with advice from a small business owner in this free video on buying a business.

Part of the Video Series: Small Business Basics
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Video Transcript

Hi, my name's Justyn, with Justyn Paul Management, and I will be talking with you right now about factors to consider when buying a business. Now, my capacity as a consultant, has usually been to look over the shoulder of my client, who has decided to purchase a business. And I go through documentation, financials, and the like, to make sure that the business is in order, and that they're getting what they're expecting to get. Now if you're considering buying a business for the first time especially, there are a couple of very important factors you need to consider. First of all, what industry are you jumping into. Every industry has it's own terminology, it's own language if you will, it's own systems, and so make sure you understand the industry very well. It may be a retail industry, but it may a retail within a particular niche. Like the medical profession, which has very specific laws about storage, and things like that. So again, just make sure you understand the industry, and so you don't jump into something that you're completely unaware of. The other thing you need to ask yourself as far as a frank assessment of your own abilities is, is are you an expert in this industry. Now that's not a prerequisite to purchasing the business, but it's certainly an important factor. Because, if you are an expert, and that's something you would consider other people that they see you as an expert, you're going to bring a lot to the table as far as information, contacts, experiences, and that can be very helpful when you're buying into a new business. Or even a very established business. The other factor of that though is, don't get to worried about it if you're not an expert, but make sure you have experts around you. You need people, employees, equipment, software, that can help you get the job done. And so that's just an important factor to consider, is whether or not, either you have the expertise you need, or you have the experts around you to help you manage that business when you purchase it. The other thing I always encourage my clients to do, is to go through a business plan. I know that when you buy a business, that's one of the advantages, is not having to think through a lot of the start up issues, like a business plan. But, it's important to go through top, to bottom, what it is that that business does. How it makes money, policy, the cost of doing business, overhead, things like that. It's just very important to understand that. Because what you may find is that the business that you're purchasing, is actually, has some financial structure that is completely unnecessary, it's bloated, and you may be able to reduce some costs. And you can identify those areas where those costs, those extra costs may be simply by going through the business plan of how you would've done it in the first place. That doesn't mean that you can immediately throw out departments, or employees, or equipment that you don't think you need, but it certainly gives you an idea of where you could immediately jump in, cut some costs. It also helps you identify, the business plan helps you identify competition; how competitive the industry is, as well as some other key factors. Finally, is the business a new business, or is it an old business. A new business, I would classify that something as having just gotten through the start up phase. Which can be anywhere from two to five years. Where it's establishing a client base, it's getting key policy developed, key employees in place. And once the business has gotten through there, that particular phase, the start up phase, then it can move into maturing. And that's where you have to understand, you need to understand where the business you'll be purchasing is in it's business cycle. If it's a young business, you're probably going to have to continue to do some intensive brand reinforcement through marketing, and advertising. You're going to have to go in and develop, probably some more policy, more training manuals, things like that. If it's an established business, there are other things that are wonderful about that. For example, the brand is ideally well established, you've got a great client base. But, there may be some bad policies. There may be employees that have been around for a long time that the old management can let go, and you may need to. So, there are pros, and cons to both situations. But it's important to understand what it is that you're buying into, so that you can think through your own plan, think through your own process for what it's going to take to make that company a success. Finally, financing is another important factor when buying a business. First thing I always ask, is whether or not, the current business owner's willing to finance the purchase. You may find that to be an excellent point, because now you don't have to go to banks, you don't have to go to the small business administration, you don't have to maybe delve into your own pockets to finance the business. Always start with the owner. See if they're willing to finance it. Then I would go to the small business administration, work with them, that's SBA.gov. That's a federally funded program to help small businesses get capitol so that they can either purchase other businesses, or make a start up. And then I would go to banks after that, and go through their normal small business loan, or business loan process. Finally, there are other capital sources, like venture capitalist, and the like, that you can go to, to raise capital as well. So, those are the big factors to consider when buying a business. A quick run through would be is to understand the industry, a frank assessment of your own abilities. Whether or not you're an expert in and of yourself, or do you need to hire experts, or bring on experts to help you run the business. Put together a business plan so you understand the business you'll be purchasing. Is it a new, or old business, and the factors to consider, the strengths, and weaknesses of each scenario. And finally, how you're going to finance the new business. Not only the purchase, but the operations for the first couple months at least.


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