There is much more to consider than the purchase price when you are buying a business. Steve outlines seven primary questions to ask when buying a business so that you have a full understanding of what you are getting for that purchase price. Whether it is company culture or industry regulation, you will want to understand how considerations such as these will impact your long term success, and subsequently your buying decision. Be sure to talk to your current business advisors for more information on how these questions to ask when buying a business might impact your particular situation, or talk with Steve via email or phone to get his advice.
I have a nice article on my website that gets into some of the things that you need to think about before you buy a business. When you’re out there evaluating a particular business opportunity, there are a number of things to consider beyond the purchase price and how you’re going to finance it.
So the article goes into great detail, but this is part one of a two part video that briefly highlights some of the issues that I wanted to share with you. You can see the first issue, when you’re visiting with a particular owner of a company. You’re going to want to know something about the history of the business, where it came from, how long it’s been around, and so forth. There can often be a number of opportunities to be found.
Sometimes when we look back at the history of a business, we see where there were opportunities they couldn’t take advantage of, or things they pursued that turned out to be a bad idea. Kind of good to know if it’s a wrong road to go down or a right road to go down when you start to have some of your own ideas as to where to take the business.
Then think about the culture. The person who’s running that business has a particular culture in place how they deal with their employees, what kind of employees they have, the quality of that group, and extends to the customer base, a certain type of customers. And some businesses have a very difficult customer base, and some have some wonderful customers to deal with. When you take over a business, you’re going to have to change the culture to be what your culture is going to be, which means some of the employees probably are going away. There’s probably going to be a change in your customer mix and even your vendor mix.
So you want to understand that culture and know how difficult that change is going to be, how far apart is your culture, or your views, as to how you’d run a business with regard to the prior owner. Because if you’re a long ways apart, that can be a lot of heartache and difficult time. If you’re a little closer, it makes it nice. I usually expect it takes at least three years to successfully change the culture from the old owner to you, so it’s not a quick process. When you start out, you don’t want to make significant changes. You want to make slow, incremental changes so that you don’t disrupt the business and potentially cause a failure, but you will implement your own culture.
Then with the employees, you have to think about not only what they’re paid, but what are the benefit programs that are out there. If you come in and take over a business and change the benefit package, especially in a way that employees don’t understand or they believe that they’re going backwards, they could leave in droves, and if they do, that could significantly impact your business. You want continuity in your employees as much as possible so that the customers who have been dealing with these employees still see the same smiling faces when you come in and take it over as there were before. Less disruption usually means better continuity in your business.
What about the accounting records? How good are their books and records? If they have poor accounting practices and don’t do very well, perhaps don’t use a CPA to do their tax return and so forth, that should be a little red flag for you, because you’re making some valuation decisions based on the quality of those accounting records, and if that history isn’t very good, you can be buying a business on really poor information that turns out to be detrimental to you. So whenever I see a business that has extraordinarily poor books and records, we either do a lot more due diligence to try and satisfy ourselves as to what the numbers are or we pass, so you want to take a look at that.
Contracts, and you can find some significant contracts with their customers to continue providing services or product, or there can be contracts with the vendors. When you’re buying that business, you may want some of those contracts to continue, and you may want some of them to end, but you need to understand what that company is legally obligated to do so that you make a wise decision as to what you may be inheriting when you buy the business.
Regulation, whether it be general government regulations, environmental issues, and so forth, make sure you understand the regulatory environment that applies to that business. Some businesses have far more regulation placed on them than other businesses. You need to understand there are some additional costs that you’re going to have in compliance with those rules. We know that businesses overall have far too much regulation imposed upon them, and that’s just the way it is. That’s the environment that we live in, but you’re going to want to understand if there are some special things that apply to you. Environmental issues are catching a lot of people, so be sure that you understand what those regulations might be.
And then, of course, you’re obviously going to visit the facility, and what you’re trying to look for is the facility to be sufficient for the operations today, or is it a little tight? If your business continues to expand, is there going to be enough room for that, or are you going to have to move at some point? Continuity, again, is important when you buy a business. You’d like to not have to move the business right away.
And also you’re going to want to take a look at the lease and understand what the lease obligations are. Do you have the ability to take over that lease, or is there a provision in there that’s going to be problematic? Sometimes people go to sell a business and don’t realize that their lease isn’t transferable, and the new owner all of a sudden doesn’t have a place to work from, so you’re going to want to understand that.
You’re going to want to understand the lease provisions, where you’re agreeing perhaps for ten more years to pay rent at a certain level. Maybe you’re not comfortable with a ten-year lease, and you want to negotiate a five-year or a seven-year lease. Understand whether the facilities are sufficient for what you want to do now and in the future, and then understand your costs and the legal requirements in the lease itself.
We’ll continue this in video number two on things that you need to know when you’re looking at buying a business.