What to Consider Before Buying a Business

Buying an existing business can be a great investment and entrepreneurial adventure. As opposed to starting a business from the ground up, buying an established business can come with trained employees and an established base of customers. It can also come with existing cash flow which means you can start earning money right away, a luxury not afforded to many new business owners. 

While buying an existing business can be an amazing opportunity, it can also be a disaster waiting to happen if you do not fully investigate what you are getting yourself into. Save yourself the headache and the heartache later on by doing the work up front to make sure you are getting into the right business for you. Here, we will discuss some of the things you should consider before buying a business.

What to Consider Before Buying a Business

Before you buy a business, you will want to go over what you are actually buying. This means looking into the value drivers of the business. These are things that can make the business a worthy investment of your time and money. A business’s location, as well as its inventory and equipment, can be value drivers. Furthermore, having trained employees that will stay on after you purchase the business can be valuable. You will also want to look at what kind of cash flow the business is currently enjoying as well as the business industry prospects for the future.

Financing will also be a big consideration prior to buying a business. It is a major purchase and you should have a plan in place for how you are going to fund it. Furthermore, you will want to make financial projections as to how you will stay afloat should the transition in ownership impact the cash flow of the business. You will also want to project what type of cash flow level you will need the business to maintain in order to pay for any debt you may have incurred in order to pay for the business.

There are also many other details that you will want to address before diving into a business purchase. For instance, will you be able to assume the seller’s lease? If the seller of the business is leasing the business premise, you will want to know whether you will be able to take over the seller’s lease and whether that can be done without a rent increase. You will also want to know how much time is left on the terms of the lease. This can all be particularly important if the business location is a major selling point for you.

Other details that can unpleasantly sneak up on you later are prepaid expenses. The seller of the business may have prepaid some business expenses, such as putting down security deposits. These are not usually included in the business purchase price but are instead added on at closing. It can be a bit of a sticker shock when you get to the closing table and see these additional costs. To avoid this, ask the seller upfront for a list of closing adjustments so that you can plan for these additional costs that will come up later on.

Getting an indemnity from the seller is also a good idea, even for the most diligent of buyers. No matter how much research and investigating you do, there may be unpleasant surprises on the horizon that were set in motion by the seller before you came along. To avoid getting sued for something the seller did prior to you taking over the business, get an indemnity in place.

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At Jones Gregg Creehan & Gerace, our team of business law attorneys wants to make sure our business clients have the support they need to take on exciting new business opportunities with confidence.  Contact us today.