Buying a small business comes with many of the same concerns as purchasing any other business. However, small businesses often have little nuances that you may not have considered or overlooked. If you’re new to purchasing a business, you should probably start with a professional service, such as an investment company or business broker.
If you’re not new to buying businesses, then you probably already know the necessity of using a broker or other professional service. In either case, here are two important questions that lead to more questions that will help you make an informed decision when buying a small business.
Do You Have a Valuation for the Small Business?
Business valuations can work in an assortment of ways. You can make a lot of mistakes in coming up with a proper valuation for a small business or the type of small business you have an interest in. If you’re unsure, confused, or find the valuation methods and formulas too difficult to deal with, then speak with someone who knows how to value a small business properly.
In most cases, a business broker will give you the best possible advice and guidance you might need. Other professional investment or banking services can also help, but business brokers work entirely on buying and selling businesses, so they have the insight to help guide you in the right direction.
This doesn’t mean you should avoid doing your own research and learning the things you need to know about purchasing a small business. You should still do your due diligence. Business brokers can help a great deal, and you should consider one necessary.
The purchase is your decision, and it’s your funds on the line. So, it’s important that you do some legwork, ask some questions, and make sure you fully understand what your business broker or other professional tells you about the purchase you intend to make. That includes their reasoning for the valuation they came up with.
How Deeply Did You Look into the Details of the Small Business?
No matter your reasons for wanting to purchase a small business, you need to make sure you understand everything you can about that business. Many small businesses comprise one or only a handful of people.
A small business may not have all the financial records, licensing, permits, and various other things you would want when considering a purchase of the business. Of course, this depends on the type of business and other aspects of how the business works. But smaller businesses sometimes have rocky starts.
For example, a sole proprietorship may start with no official business structure while operating strictly under someone’s social security number, rather than an EIN. If they later become organized, they will have lost or muddy information concerning everything prior to their official transition into a full-fledged, IRS-paying, proper bookkeeping business.
Yet, you will want to know what types of things were going on in those earlier days that may come back to haunt you after you purchase the business. All that said, you will typically want to investigate:
- All the financial information
- Everything about the business structure
- Everything about the business operations
- All material contracts
- Every bit of customer information
- All the employee information
- Every physical and digital asset
- Every piece of intellectual property
Depending on the business, you may also need to know about certain local laws, zoning rights, licenses, permits, and regulations that might come along with the business or become necessary once you own the business. There’s a lot. But it’s important to have a full profile of a business that you want to buy, whether it’s a large one, a tiny one, or anything between.
Sometimes, you’re purchasing assets and not the business specifically. Understanding the key details of the business can help you avoid mistaking one thing for the other. When you know what you need to know, you can make a more informed decision.
Gaining all the information you need can sometimes become difficult, especially if the seller doesn’t seem to have all their paperwork together. Your business broker can help with this process a lot as well. Many people, even business professionals, don’t always know exactly what they should pay attention to when buying a small business.