The formation of a business from scratch can be a strenuous process. Many times, entrepreneurs opt to purchase an existing business to avoid hefty startup costs and headaches. However, purchasing an existing business is not stress free. There are still issues that can go awry when purchasing an existing business from a previous owner. To avoid problems, entrepreneurs should take the following steps:
- Obtain information on why the business is for sale;
- Obtain certain financial and tax information, including expenses and debts;
- Assess the location of the business;
- Speak with the current owner(s) and ask vital questions pertaining to the current state of the business, among others.
One consideration is to understand why the business is up for sale. Is the business being sold because the owner would like to retire, or is the business being sold because of a lack of profits? It is important to analyze past sales reports and past tax returns, approximately three years back, and determine current sales forecasts. It is also wise to look at the income to expense ratios for the business. If the expenses outweigh the revenues, that could be an underlying reason as to why the owner may be selling the business.
Debts are also of comparable importance the business. Purchasing a business entity also includes the assumption of debts and tax liens. The seller of the business should disclose this information at the onset of negotiations, however, an entrepreneur may be forced to sift through the necessary documents to be aware of the potential impact of debts. If there are significant debts and liens on the business, this may indicate a red flag and deter the entrepreneur from investing in the business.
Especially in retail and storefront services, another aspect to consider is the business’s location. Aside from money, the operation of a business is heavily focused on location. If a business is in an undesirable location, that could contribute to a decline in profits. The location of the business is important, however, the location of similar businesses in the surrounding area is also very important. If the business has significant competition in the area, it may not be to an entrepreneur’s advantage to invest in that particular business.
Aside from personal investigative research, it is wise to meet with the current owner of the business and have them explain the current business situation. Current owners may also be able to provide information about typical clientele, operating techniques, and other pertinent information that goes into the daily operation of the business. With this, an entrepreneur will be able to make a more informed decision on whether they would like to invest in the business or not.
If you are considering purchasing an existing business, it is important to contact an experienced Westchester business law, commercial and business transactions attorney to advise you throughout the decision process and assist with the transfer of the business. For more information or to schedule a consultation, call the attorneys at Martin Grossbach, P.C. at (914) 631-6666 or to fill out our contact form.