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Do Your Homework When Buying

Do Your Homework When Buying

There are several reasons why someone decides to buy a small business. Some buyers are new entrepreneurs who desire to take their first step towards being a small business owner. Others seek strategic steps to improve their existing business market presence, and yet others (suppliers or supplier customers) initiate vertical integrations to drive growth and capture profits. Regardless of the reason each type of buyer starts at the same place, looking for an opportunity without having much insight into the business being reviewed. An initial and crucial step is for a prospective buyer to proactively prepare for the journey ahead. Do your homework during the search in order to focus your efforts on real business opportunities and avoid those sellers who are looking to escape a sinking ship.

Start with developing a strategic plan including your buying parameters which frame your objectives, including your preferred industry, revenue size, geographic area, general timeline, and relative financial abilities (e.g., down payment, price range, etc.) for buying.

Second conduct your research well before you engage the seller, and dig as deep as possible to fully pre-vet the business that you’re interested in pursuing. Utilize publicly available information to learn about the business, the industry, and the customer prospects. There are several critical areas you can investigate before engaging a seller. The following highlight those areas of interest and the key questions to answer before taking the next step:

  • Competitors – Are there many direct competitors geographically located that will hinder your growth prospects? Have more competitors entered the market recently? What is the perception in the market for the target business compared to its competitors?
  • Customers – Is the business dependent on a growing population demographic or changing market demand? Is the trend going in a positive direction for the business being reviewed?
  • Economic Value – Does the asking price seem to make sense at a first glance? Understand the market in terms of size and pricing tendencies and how that correlates to your ability to make it successful over time.

Once you are fairly comfortable with the business opportunity, based on your initial review, engage the seller in conversation and begin to plan for a complete due diligence investigation. When the seller knows that you are serious, they become serious and will actively assist you in the process.

Using the services of a professional advisor can greatly reduce the time period and risk in the sales process. Knowledgeable advisors can appropriately advise you on buying or selling a business.

For more information or to schedule a complimentary consultation please contact BridgeLane Advisors, at info@bridgelaneadvisors.com.