If you’ve got your eye on a new business, you’ve got a lot of research to do. We know you’ll ask for financial records, look into the economic stability of the area, and be critical of the asking price, but it’s hard to uncover everything there is to know about a company.
To make an informed decision, we asked Manny Skevofilax, a financial business consultant and owner of PORTAL CFO Consulting, to help us compile a list of not-so-obvious areas that you should look into before buying a business.
1. Know why the business is for sale
When you’re considering a big purchase, you need to be a little skeptical. You’ll want to know why the current owner wants to sell.
“If the business owner couldn’t give me a compelling reason why they were selling the business, I would see that as a red flag,” Skevofilax says. “In my experience, most entrepreneurs absolutely hate the idea of selling their business. They have been through thick and thin; good times and bad. There has to be a really compelling reason for them to sell.”
You should discuss this with the current owner and ask around too. If you get conflicting answers or don’t feel as though the owner is being 100 percent truthful, it could signal problems ahead.
2. Customer concentration
When you’re weighing your options to buy a business, you’ll want to know where the bulk of the revenue comes from. Some businesses rely on one or two strategic customers for the majority of their revenue. It’s not necessarily a bad thing, but Skevofilax says you need to know if those customers will stay on board after the sale.
“If these customers decide to move their business elsewhere, will the business you’re buying still be able to thrive?” Skevofilax asks. “Can the lost revenue be replaced quickly or is it a losing proposition for you?”
Knowing your customers is a key piece of market research that you’ll want to look into before making a decision.
3. Key employee retention
Talk with the current business owner to identify key employees before you close the sale, Skevofilax suggests. If you decide to buy the business, there will be an adjustment period. One of the best ways to ease this transition is to retain vital employees. For instance, you may want to keep the sales staff to maintain customer relations, or maybe there is a phenomenal accounting staff in place. Make sure you know who the key players are before you buy the business.
4. Government regulatory constraints
Many businesses have to comply with certain government regulations. If the business you’re interested in has regulations, make sure you have a solid understanding of the rules before you move forward with the sale, Skevofilax says.
You’ll also want to talk with politically connected people to see if any of these regulations are slated to change. If changes are made, what does that mean for your bottom line?
“One change in regulations could cause your costs to increase so much that your business could turn unprofitable overnight,” Skevofilax says.
It’s not an area you want to overlook. Take the time to investigate the regulations. Don’t just talk with the current owner about them; talk with others in the industry as well.
Buying a business is an exciting proposition. In many cases, a customer base has already been established and so has a reputation. These are great assets to start with. Make sure all the positives don’t blind you, though—you want to make sure you investigate every inch of the business before making a decision to buy.