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Buying a company can put you in business quickly. You have the advantage of stepping into a working concern with inventory, sales, product recognition and a supply chain already in place. However, you still need to do your due diligence, especially when buying directly from the owner. Have your questions ready when you begin sizing up a for-sale-by-owner business, and you can navigate your way through common pitfalls.
Why the Owner is Selling
You should ask an owner why the business is for sale. According to the company Fair Market Valuations, which focuses on businesses that are for sale, business owners sell for common reasons. These include owner burnout, retirement, illness or family issues, a declining customer base, new competition, the owner’s long-term exit plan and the desire to take profits by selling. As you can see, some of these reasons bode well for you, but others, such as losing customers and facing tough competition, can be red flags that warn you to look for a business elsewhere.
Owner’s Discretionary Income
You need to know what kind of personal income the owner has from the business. If this figure isn’t enough for you to live on, this may not be the business for you. If the figure is sufficient for your needs, you still must have a way to confirm it. Ask the owner to put the figure in writing, and ask for documentation such as tax returns or bank deposit records. Also, if the owner claims to take out more than his records show, this may be a sign that the owner is not honest and may be misleading you.
Current Licenses and Permits
An owner who is selling may overlook the need to keep permits current. You should ask if all licenses and permits are up-to-date and ask to see them. One of the reasons to buy an existing business is the ability to begin running it immediately. If you have delays in getting permits, or if you can’t get them at all because of a violation by the previous owner, you have lost one advantage of buying the business.
You deserve to know whether the owner is worried about upcoming competition. This is a different concern than current competition. A new company may be coming out with a product that could make the business you’re buying obsolete. This happens when digital versions of products completely replace old versions, or when a manufacturing process makes a product so inexpensive that you can’t compete with the manufacturing equipment that is part of the company you buy. Always check to see if some industry news about revolutionary changes has rendered the current business obsolete.