Questions to Ask Yourself Before Buying a Business
Buying a business is a major decision. It will not only affect your financially, but it also constitutes a lifestyle change. If buying a business is a decision that is right for you then there are a few things that you should contemplate or ask yourself in regards to a contemplated transaction.
What is your reason for the purchase?
Yes this sounds fundamental but our experience has told us that some buyers sometimes lack a reasonable rational for their purchase. So ask yourself, why are you interested in purchasing this business? If you can't answer that question, then stop right there! Buying this business is probably not in your best interest.
How long have the target business been in business?
Companies with a long track record of profitable operations indirectly communicate that demand for their goods or services exist. The business is most likely known in the market and has a recognizable brand name. In general, the longer the firm has been in business, the better your odds that the organization you are buying is solid and sustainable.
Why are the owner(s) selling the business?
This is probably one of the more important questions you should ask yourself. There are legit and not so legit reasons why an owner is selling a business. Unfortunately, you must keep your perspective and skepticism when addressing this question with the selling party. After all, who would say that they are selling their business because they know that it will loose a major customer! A well executed due diligence usually shed some light to this question.
Are the books in order?
The way the books have been kept is sometimes a reflection on how the business has been run. Be skeptical of non GAAP compliant books that have not been certified by a 3rd party CPA firm. Tax records are official records and should be reviewed. Just remember that they are usually maximized for tax efficiency meaning that non discretionary expenses have been included in the financials. Also remember the company's financials reflect history and are not necessarily indicative of future performance. Good industry knowledge, a strategic mind set, and due diligence is crucial to understand the company's future earnings potential and consequently it's current value.
Of course, there are thousands of other questions you need to answer before you purchase a business.
If you have any questions on the above material or want to know how KDS Capital can help you in your venture, feel free to call us at 602-490-0723 or toll free 800-880-0717.