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To Buy or Not to Buy? The Answer Starts With Questions

Posted on February 10, 2014 at 3:23 PM
Tags: small businesses

Business for Sale.jpgUp to now, we've focused on fundamental issues that anyone thinking of starting a business from scratch should understand before diving in.

But what if you've got your eye on an existing business or a franchise? Well, the same organizational and operational basics still apply. But before you even get to those, you have to know a whole lot more about the prospective business.

Careful evaluation of any business opportunity is an essential first step, one that is too often skipped entirely or given short shrift as over-eager entrepreneurs leap before they look, their judgment clouded by sheer excitement and warm-fuzzy hopes for the business instead of being guided by cold-blooded financial analysis.

Lots of would-be entrepreneurs have learned the hard way that ignoring this crucial step is a recipe for trouble. And they've got the battered, bruised and broken wallets to prove it. So, how do you avoid their fate? There are no foolproof steps, but here are a few things to consider.

Don't Commit Too Soon

Seeing the potential in a business can be downright intoxicating. It's easy to get carried away, easy to rush. But now's the time to keep your head. Slow down. There's much to learn before you'll know whether the business is right for you. Remember, lots of bad businesses can make a good first impression.  Don't sell yourself on an illusion. You have to see things as they are, not as you'd like them to be. Make the business prove its value before you decide to buy. And be prepared to walk away if it doesn't.

It's also crucial to complete your evaluation BEFORE you make any kind of commitment -- written, oral, contractual or financial -- to the seller. Go ahead and show deep interest in the business. That's just fine. But make no promises. Offer no money. Make no payments of any kind or size. Period. Keep your checkbook and your mouth closed tight until you have all the information you need to make a sound decision. 

That may seem obvious, but you'd be surprised how many people make the mistake. Don't say or do anything that obligates you in any way until a thorough evaluation is complete.

Dig Up Any Dirt 

It's a good idea to check up on the company you're interested in buying -- and the people who are offering to sell it.

Start with some basic background research. Does the company have problems you should know about? The Minnesota Attorney General's Office and the Minnesota chapter of the Better Business Bureau can tell you if any complaints have been filed in connection with the business. 

You should always be alert to the possibility of fraud. The National Consumer League’s National Fraud Information Center can help you smoke it out. The organization operates a consumer hotline and tracks and identifies fraudulent operators. And the Federal Trade Commission provides summaries of legal actions against people who've offered fraudulent franchises and business opportunities. 

A quick check of criminal and civil court records under a company's name or the names of the owners may also prove revealing or reassuring.

Essential Details You Should Get From the Seller

Start with the basics. Remember, be skeptical. You want facts, not opinions. You want documentation, not someone's word. 

Talk to anyone named as owners or investors in the business. Don’t rely on anyone listed as references, unless it is clear that they are truly owners or investors.

It's essential that you thoroughly investigate any claims made about potential earnings. You want the deep financial details for the business and credible market analysis for the industry. In every case, you want details, details, details. Numbers will tell the tale. Listen to them.

If the business you're interested in buying is considered a franchise under the Minnesota Franchise Act, the seller is required to file certain documents with the Minnesota Department of Commerce. One of the documents, the Uniform Franchise Offering Circular, will contain detailed information on the business, including audited financial statements. While it's a valuable starting point, the document may not be painting a full - or even accurate - picture. The Department of Commerce (or any other government agency for that matter) cannot vouch for the accuracy of any of the information. It's your job to verify the details.

Even if a business is not considered a franchise under state law, it still may be subject to the Federal Trade Commission rule that requires sellers to provide certain information. Check to make sure. If there's information available, you want it.

Always be aware of high-pressure sales tactics. If you're feeling pushed or steered by the seller, take it as a warning sign. Be wary of any claims or statements made in conversation with the seller that differ from those made in writing. Be suspicious of any presentation that promises easy money. There's no such thing. Owning your own business may be financially rewarding, but most successful entrepreneurs agree that it takes a great deal of time, energy, and hard work to make it happen.

Using Professional Advisers

There are people who have the business, financial, and industry expertise to do their own analysis. If you're not one of them (and you already know it in your gut), it's a good idea to hire an accountant who has expertise in business valuation and an attorney. Buying a business - even one that's small and simple - can be complicated. Mistakes made along the way can prove costly -- and even threaten your chances of success after the purchase. There's just no substitute for expert financial and legal analysis and guidance.

Remember, too, that you're getting more than just professional skill when you hire advisers. You're getting objectivity. They have no emotional attachment or stake in the outcome of the review. Their cold-blooded analysis can be an important counterbalance to your hot-blooded enthusiasm. 

Learn More

Consultants at our Small Business Assistance Office can help you understand more about evaluating a business opportunity. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.

For a comprehensive look at factors you should consider when buying an existing business or franchise, see our Guide to Starting a Business in Minnesota and our Introduction to Franchising. Available for download in PDF, formatted for e-readers, or available in print (all free of charge), the books cover the major issues, questions and concerns about business start-ups and franchises.

Nothing we cover in this blog should be taken as legal advice. It’s not. And it’s no substitute for the professional guidance of a lawyer or accountant.

The Last Word

Is business a science or an art? Can entrepreneurship be taught? Eric Ries, author of the best-selling The Lean Startup, weighs in.

[http://youtu.be/Laz4nUTeMRc]



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