Buying a business can be a great entrepreneurial move…as long as you do it smartly. While buying a business usually has more upfront cost than starting one yourself, the purchase will carry less risk because you can look at actual sales figures, tax forms, and company history before making a decision to buy. It is often easier to look at the past success and failures in an existing company’s history and improve rather than starting from scratch.
However, if you fail to make smart moves, you could end up stuck with a major headache for the long haul while the seller cashes your check to sip mai tais on the beach.
1. Look at the company’s tax returns. In fact, look at as much history and company data as you possibly can—but especially look at the tax returns. Do not be surprised if they tell you they underreport their sales on their tax returns. Take this as a sign that they may be dishonest in making their business look good for a sell.
If they tell you that they underreported, get verification of their actual sales and make sure you will not be on the hook for any financial liabilities that may come up as a result of their underreporting.
2. Keep the seller around. Try not to let the seller run off to Hawaii with your check just yet. Keep him around to introduce you to key customers and employees to make the transition less jarring and to earn everyone’s loyalty. Longtime customers who trusted the owner will feel much more comfortable with you if the original owner is there to make the introductions.
3. Keep the key employees. In addition to the owner, keeping key employees around will help with the transition. They know the company’s processes better than most, along with what has made the company successful (or struggling) thus far. Keep them on the payroll and pick their brains about what they think should stay and what needs to change in the company to keep it going.
If they do not want to stay after the transition, try to convince them that the change in ownership is an opportunity to refine the processes that are good and eliminate the ones that are hurting the company. If you kept the seller around, they may help you persuade the key employees to stay as well.
4. Consider the non-quantifiable factors. There are a lot of factors that lead to a company’s success, not all of them will be captured on sales charts and portfolios. Talk to loyal customers and employees. Is the company known for exceptional customer service? Honesty? Quality products? Figure out why customers choose this company over its competitors so you know what to maintain. When you talk to the employees, find out why they like working there. Good coworker cohesion and sense of community? Strong mid-level managers, who lead well?
Knowing these intangible factors will help you understand what makes the company tick before you start making changes that could inadvertently do damage.