Dear M & M: I am interested in buying an existing business. It looks too good to be true what am I missing? – Doug
Buying an established business can be a good plan. Generally if it is running it comes with all the equipment, fixtures, inventory, office furniture, reputation, branding and a staff of ready trained employees. Let’s take a look at all these golden assets that “come with” the business. One of the first things to consider is the depreciation schedule. Is there anything left to depreciate for tax purposes or has it been written off already? Has the equipment been maintained or is it old, outdated and hanging together by strings?
Are all the fixtures working properly, lights on, clean, and serving its purpose? The same with inventory. What did you pay for the products gathering dust that have not sold in the past 5 years? Could you buy newer or better inventory at a lower cost somewhere else? How about the office furniture, office equipment, or software?
Is everything up to date, or is the chair worn out and needs to be tossed and are there newer software programs available that would be more efficient? Does the company have a reputation, does anyone recognize their branding efforts? Go online, read some reviews, ask a friend and do some digging. Is the brand recognizable and what reputation does it have.
Another great thing to do would be to secret shop the store, call them up on the phone, and ask some friends what they think about the place. Keep in mind they have been running the business how they saw or wanted to. You might have some different ideas or ways you think you can make the place better. Ask to see some income tax returns, examine the books.
Find out exactly what you are buying. Is the building part of the deal? If leasing what does the landlord have to say about what you can and can’t do? Could you start a new business doing the same thing in a better location with newer products and better employees somewhere else? Why are they selling? Are sales declining?
Is new competition moving into town? Will this business be around in the next 5 years if they continued to run it the way they have the last 20? One can see buying an existing business has just about as many advantages as disadvantages to it. One has to weigh the good against the bad and base a decision on facts not feeling.
Just because a business is open and has been around a long time does not necessarily mean it has been running as a profitable enterprise. Just because it has been in operation does not mean you don’t need a business plan. Remember one can buy the assets (building, land, equipment) and not the business. Many times a location can be re-purposed.
Seek advice from your accountant and attorney to discuss the differences between buying a company (LLC, S Corp., C Cop., etc.) and buying the assets of a company. There are tax, general liability and market reputation facts to consider.