There are a number of reasons it pays to buy a pre-existing business. However, if you don’t know what you’re doing, there are all kinds of ways this investment could backfire big time. The following tips should give you some important things to think about before making your purchase so you stand a better chance of being happy with your decision.
First, it’s perfectly fair of you to expect seller financing for this transaction. In fact, most sellers will either expect this or immediately understand it. We’re a long way from the days when money was easy to come by for small business owners looking to borrow. Like most people, you may not have sufficient collateral sitting in your home’s equity either.
Another form of payment you may want to consider is done via what’s called an earnout. Essentially, this type of transaction occurs when you and the seller can’t even agree on a foundation for terms. The seller proposes a price based on how well the business has done in the past. You think that it only makes sense to pay for what he company is currently worth.
To help resolve this disagreement, an earnout means you make ongoing payments based on how well it does in the future. You decide on terms that make clear when the payments will stop and then begin making them after close of escrow.
Speaking of the difference between past and present, you must also consider how much a company will cost to run and adapt to the current economy. If you were buying a home that needed a new roof or a kitchen, you’d be sure that was factored in, right? Maybe you’d even ask the current homeowner to pay for it. The same goes for buying a business. You may have to do a lot of work before it becomes profitable, which means considering what that will cost.
Finally, renegotiate with any vendors you can. The business may be renting its office space or storefront, for example. In today’s world, it’s generally a tenant’s market, meaning you should be able to push for a better price. Go through all the current vendors the business works with and try negotiating with as many of them as possible.
Never rush into buying a business. Instead, review the above advice so that you stand a better chance of making a sound decision.