What To Consider When Buying An Existing Business

It’s likely that you are wanting to buy a business because you are looking to increase your income and generate wealth for the future. Owning a business is one way to make that happen, but the reality is that buying an existing business is a big decision.

If someone was choosing between buying an existing business or starting a new one and compared the initial costs to do that they would find that in most cases the cost to purchase a business is much higher. This is because an existing business has assets and revenue that get factored into the price, whereas a startup can be founded on less capital. Although, this isn’t always true. For larger businesses with more infrastructure and assets you can find that, depending on their financial situation, you will get a price that is less than what it could cost to start up.

Additionally actually purchasing a business and running due diligence on a deal can be very complex. We at GenX Capital have years of experience buying and selling businesses so we put together this guide on what you should consider when buying an existing business.

Buying a Business Tip 1 - Why Is The Owner Selling the Business?

When a business owner is looking to sell their company the most prominent belief at first is that they are selling due to some issue going on in the business. This issue could be financial or some other personal or economic reason that is hidden behind the scenes. This isn’t actually the case. The majority of business owners sell because it doesn’t fit the lifestyle they want to live. We get it, things change and the reason someone got into business in the past may not be aligned with what they want out of life now and feel the need to move on. There are quite a few common reasons owners sell.

Here is a quick checklist of reasons a founder might be selling their business: 

• The business is in financial distress due to decreased sales or an inability to pay back loans used in an attempt to grow the business.
• The business is in a financial surplus, due to a booming economy or smart business & marketing moves on their part. This situation leaves you the buyer paying a massive premium on the business.
• A life changing event such as a death or divorce will move businesses to be sold fast.
• A business owner may have reached their limit and cannot generate any additional growth. This is a huge opportunity for buyers.
• An owner may be ready to retire and wants to exit with liquidity to be done with “work”.

There are many other reasons business owners sell but this list covers many of the most common reasons we see all the time.

Buying a Business Tip 2 - Is the Business Making Money?

This one seems obvious but to make a good investment decision you need to understand if the business is making money or not. Even if a business isn't making money that doesn’t mean it won’t be a good deal, it could actually be what makes the business purchase a good deal for you.

To understand if a business is making money, you need to get a hold of all financial and banking data from valid sources. This can be items such as certified bank records, accounting data, files tax paperwork, etc. Having all of this information will give you the tools you need to see how much a business is bringing in, how much money is going out and what that will mean for you in the present, short term and long term. An additional plus to this is that it also gives you leverage when it comes to price negotiations.

Buying a Business Tip 3 - Don’t Just Consider The Hard Data When Buying a Business

While we just told you to get the financials and use them to aid in your decision making, putting your faith in the hard data presented to you by the owner only can be a costly mistake. Some factors will need to be checked as well.

A big factor you should look into is the reputation of the business. Finding out if the business is in good standing within the community is a bonus because you don’t want to become tied to a situation where you are buying enemies along with the purchase of the business.

Where can you check on a business's reputation prior to buying?

• Talk to neighboring businesses
• Talk to the mayor
• Reach out to customers
• Look at reviews online
• Call and speak with the BBB (Better Business Bureau) 
• Speak with staff (past and present) *we talk more on this in tip 4

This isn’t an exhaustive list, but it’s a starting point.

Buying a Business Tip 4 - Talk to the Staff Before Buying The Business

A huge point in due diligence is to talk with the current employees of the business. You can learn a lot about the company that you wouldn’t learn by simply speaking with the owner or examining the financial data.

Another big benefit is to ensure you are covered legally by talking to employees about their current role, job responsibilities, compensation and contracts. You will be able to avoid conflict if you communicate your plans, any changes you’ll be making or even if you are keeping things the same, sharing this information will put the current team at ease.

Ultimately, buying a business can be daunting and for most people it’s really too much to deal with. Instead, you can work with a firm who does this every day. At GenX Capital, we specialize in finding businesses primed for sale that have huge upside potential, buy them, sell them and generate profits for investors like you.