How to evaluate and purchase a small business

Reviewed: April 17, 2014
By FinanceWeb

Purchasing a small business is a significant transaction that should be approached with a strong sense of professionalism. A business buyer should remember that the transaction is a significant event for the seller as well, which is why respect should be shown by both sides.

Before investing in a small business, you should do a great deal of research and make sure that the purchase is right for you. You can learn a lot by observing how the business operates, talking to customers, and talking to current employees as well.

Is The Business Growing?

It will be significantly easier to get financing for your business purchase if the business you are buying is growing. You can look at the company books to see how much growth the company has experienced, but you should also observe customer activity as well to determine if the company is indeed taking in more revenue from year to year.

The biggest pro to a growing business is that the bank will be comfortable approving your financing, which speeds the process along. The con to a growing business is that your idea of growth may be different than the current business owner’s. You may want to see 20 percent growth and the business is only showing 10 percent. It is growth, but not the kind of growth you are looking for.

Will Your Changes Work?

You are going to want to make changes to the business after you buy it, which is you prerogative as the new owner. But will your changes help the company grow, or will they cause the revenue to drop?

Talk to the customers and try to get an idea of what kinds of changes they want to see, and then compare the changes the customers want with the changes you will be making. If your changes are in line with customer needs, then you have a good chance at success.

The pro to changing a business after you buy it is that you will be able to put your own stamp on the business and make the changes that you think will make the company more profitable. The con is that your changes could fail miserably and may even put the company out of business.

What Cosmetic Upgrades Does The Business Need?

Anyone purchasing a small business will want that business to be fully functional after the transaction is over. If you are not expecting to make any cosmetic changes to the business location, then being surprised with a long list of facility needs can be frustrating.

Many new business buyers neglect to have the facility inspected before purchasing it. The pro to having the facility looked over by a professional inspector is that you will find out if you have to make any major upgrades to the building just to stay in business.

There is no downside to having the business facilities inspected prior to purchase. The current owner may be violating building codes in the hopes that a new owner will have to deal with those problems. When it comes to buying a business, you do not want surprises.

Will The Transition Be Smooth?

Sit down with the current owner and see how interested he will be in helping to transition the business from him to you. There is a lot at stake when a new business owner takes over and having the previous owner’s stamp of approval helps to make the transition smoother.

The pro to working with the current owner for a smooth transition is that the customers, vendors, and employees will know exactly what to expect when the business changes hands. It is extremely important to keep these groups happy if the business is going to efficiently change hands.

The con to trying to work on a smooth transition with the current owner is that the current owner will not cooperate. If you cannot negotiate a smooth transition from the current owner, then you may have to consider it a deal breaker.

Purchasing a small business can be exciting and lucrative if it is done properly. But if the buyer makes any mistakes along the way, then it could wind up being the worst investment that buyer has ever made.