The key to purchasing a small business without buyer’s remorse is to understand your motivations and do your homework. That can prevent a buyer from paying too much, being deceived or getting involved in an unfamiliar service or industry.
“There are people who fall in love with a business or concept,” says Panda Morgan, director of the Northeastern California Small Business Development Centerserving the Sacramento region, “and then there are people who fall in love with the concept of being an entrepreneur. They think when you work for yourself you have all this free time and you set your own hours.”
Some people underestimate how hard it is to run a business — a role in which they ultimately are responsible for everything, and the concept of 5 o’clock means nothing. The truth remains that most people who work for themselves end up working far more hours than those who work for others. So real knowledge and passion for a business is key.
A helpful exercise, according to business psychologist Pamela Rutledge, director of the Boston-based Media Psychology Research Center, is to sit down and make a list of why you want to purchase a business. Put your ideas in writing and separate the realistic ones from the idealized ones.
“A lot of people confuse how they want to see themselves with purchasing a business,” Rutledge says. “They might tell themselves they want to make wine, or breed Labrador retrievers or open a Montessori school. But there is a big difference between identity and the day-to-day work of running a business.”
Besides considering your motivations it is as equally important to consider the motivations of the seller. Ask the seller why he or she is getting out, and really listen to the response. Does the reason for selling make sense? Is it something he or she has grown tired of after 25 years, or has this “amazing opportunity” only been in operation nine months?
“Sometimes the seller is running away from a business,” says Director Jack Mayfield of Score, a national organization that provides free small business counseling.
“Either they’re fed up, or are trying to dress up a really bad business and pretend it’s a good one. So you want a good feeling for the integrity of the seller.”
Having decided your (and the seller’s) motives are pure, the next step in purchasing a business without regret is to analyze the market. Know the product or service inside and out. Is the market on an upswing? Or is it contracting? If it’s a brick-and-mortar business, look at the storefront. Is it clean, orderly and safe? Sit in the parking lot and watch how much traffic is coming in. Interview existing customers. The point is to gather as much relevant data as possible to help you make your decision.
If it’s a storefront operation, Morgan recommends that a buyer makes sure the landlord will let him or her take over the lease. She has seen several instances where buyers assume they can automatically take over a lease, but end up not qualifying.
Having done all that, now is the time to hire the services of a CPA to help with due diligence, such as combing through three to five years of tax returns. Think of tax returns and financial reports as the report cards of a business. They’re the only way a buyer can tell if the business was well-run and profitable.
“If a business doesn’t have organized records, I wouldn’t touch it,” Mayfield says. “It’s a huge red flag. Not having something so simple as a profit-and-loss statement tells you they ran it out of a shoebox. That you’re not sure what you’re buying, and they’re not so sure what they’re selling.”
Another aspect a CPA can help with is making sure the business doesn’t have any outstanding liabilities or claims. Are there any environmental or regulatory issues pending? Have all the taxes been paid? Are the insurance payments up to date? Questions like these are important because a buyer doesn’t want to inherit a bunch of problems.
Morgan says perhaps the most important function served by a CPA is performing a proper valuation. A valuation tells the buyer the correct dollar amount that should be paid for the business.
“I think the No. 1 regret is how much people spent,” Morgan says.
In addition to hiring a CPA, a potential buyer will likely retain a business attorney to handle the legal aspects of transferring the name and assets of a business from one owner to another. A buyer should seek an agreement that carefully describes the exact condition of every aspect of the business so there aren’t any surprises. And a lawyer can help negotiate terms and draft an asset-purchase agreement.
If a buyer is still on the fence about buying a business after doing all the homework, Rutledge says, it is helpful to see if the buyer can tell the story of why he or she wants to buy the business.
“This can help you determine whether it’s a true passion, or just some image of yourself as a successful entrepreneur, standing on the beach with a martini,” she says.
Originally posted: www.bizjournals.com
Written by: Dorsey Kindler