Key Questions To Ask Before Buying A Business

I recently learned that my favorite bagel store is going out of business. They had been in business at the same location for 25 years. They were a mom and pop operation hiring many of their own family members to work in the store. When I heard they had to close due to unforeseen expenses, I thought to myself "maybe I should buy their business?" After all they appeared to have a successful operation and have lasted in the same location for quite a long time. 

In addition, statistics show that there is no better time to own a business than right now. The economy is growing and with recent tax cuts business ownership has never been more attractive. The Small Business Administration reports that approximately 25 million people in the United States have started a business since 2015.

While there is no magic formula to making a business successful, it is important to know what you are getting into before you buy a business. If you are considering buying a business, whether the business is brand new or has been around for decades, it is important to perform your due diligence. This article addresses the key questions that should be asked if you are considering buying a business. 

1. What is the business money situation?  

For anyone considering buying a business it is critical to evaluate the company's money situation. This means gathering profit and loss statements and balance sheets. Reviewing P&Ls will give an idea of the company's gross profits, margins, payroll expenses and other liabilities that may not be readily noticeable or even disclosed by a business owner who is looking to sell. Reviewing P&Ls can show whether the business is really sustainable or whether there are hidden liabilities that may come with the purchase.

2. Are there any outstanding legal issues facing the business?

Buying a business can be exciting until you find out that the business is facing a huge lawsuit. Not only can litigation end the business it can actually end up costing business owners time and money. If the business is not set up properly, the business owners could end up being personally responsible for any judgments awarded as a lawsuit. For these reasons, you need to determine any and all legal matters at play. Does the business have tax issues that might end up in litigation? Is the business being sued? Are there contract disputes? These are all matters you will want to explore before buying a business.

3. What is the business structure?

Like we said above, corporate structure is important and can end up costing you in the end if the business is not established correctly. While there is no "right way" to structure a corporation, different structures offer different benefits. Depending on the type of business structure, may depend on long-term buy-outs and other matters that will affect your business.

4. What is the company's value? 

Remember the bagel shop we were considering buying? Well, the owner wanted to sell it for $500,000. In the end, we have to ask ourselves is the bagel shop worth $500,000? The answer was no. While the business owner considered the shop her baby, the real value of the shop was not at all worth what she wanted to sell it for.

When considering a company's value, you will likely want to hire an expert CPA to determine how the company stacks up against others in the same industry. A good business valuation will show you the risks of taking on a business as well as the value of assets on hand.

Due diligence may be time-consuming, but it is an essential part of buying a business. At Rosenblum Law Offices, due diligence is part of our practice. We offer practical advice and quality service the simplifies the process of owning a business. As experienced business owners, we look forward to helping you with your business purchase. Call us today for more information at (702) 433-2889.

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