Ten Points to Remember When Buying or Selling a Small Business

Dec 30, 2011

If you are in the process of buying or selling a small business, there are several factors to keep in mind. Not all of them will apply to every situation, but whether you hire a business broker or not, here are some valuable tips for the entrepreneur

  1. Never buy or invest in a business that you don’t completely understand in an industry that is unfamiliar.  This doesn’t mean you need to know everything there is to know about the business, but you should make sure that training is available to you from the current owner.  If you are buying a small business, it’s important to understand the basic principles of the business, its competitors and any challenges that could be on the horizon.
  2. Make sure you if you are buying a small business that you get the training and support you need, especially if the business is seasonal.  You should know all aspects of managing and operating the business throughout every season of the year.
  3. Before buying a small business, set the top price you will pay in your mind. It should be one that you can afford and that you believe the business is worth. If the seller isn’t willing to make the business available to you at a price you can afford, don’t be afraid to walk away.
  4. If you plan to acquire everything that the owner is selling, including the businesses’ tax liabilities and debt, then you may want to consider the alternatives.  There are ways to purchase the shares and assets of a small business without the liabilities.
  5. Consider various financing alternatives, and remember that seller assisted financing is an option.  If you owe the seller some money, he or she may have an incentive to help you succeed, and it will give you bargaining power if any financial disputes arise after buying the small business.
  6. Remember, the seller’s net cash flow may be higher than yours due to the fact that he is no longer carrying the debt you incurred to buy the business. The seller also has years of experience and is likely to make fewer errors and while running the business more efficiently.
  7. Most small businesses do not accrue any reserve cash for warranty expenses. It is important that the cost of any warranty issues be resolved with the seller prior to buying a small business. If you purchase the shares of the company, you are accepting any and all warranty liability costs and issues for warranty claims in the period prior to acquiring the business.
  8. If you are acquiring a service-oriented business, remember that you are primarily buying a business whose assets are its people. Buying people is always a dangerous game, and you can never be 100 percent certain that the people will stay on board after you become their new boss. Before acquiring this type of business, investigate the market for available people with the skills you would need to employ.
  9. Once you have found a small business that you want to acquire and you have come to a general agreement with the seller on major terms and conditions one of the parties, the seller or buyer will draft the agreements.  In general, the party that drafts gets more of what he wants than the party that doesn’t. As well, your lawyer will add the protection clauses that are appropriate for you as a buyer, where the seller s lawyer will generally not include those clauses.
  10. There are always downsides or negatives with any business. The seller will always disclose all the positives, but the challenge when buying a small business is to learn about the negatives.  This may require a little detective work and some due diligence, but never enter into an agreement until you know what they are.

No matter what type of small business you are buying or selling, be sure to keep these valuable tips in mind.