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Tips on Buying a Small Business

written by: SallyOdum•edited by: Jean Scheid•updated: 7/6/2011

“Don’t quit your day job,” Sarah said as she peered at her friend over her cup of coffee. “But that’s the whole point in starting my own business,” Jane answered. “I want to work for myself. To live the great American dream by buying a small business.”

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    “But you need a way to support yourself while you’re seeing if the business is going to be viable. What will pay your monthly bills with? How will you manage for the kids? Don’t you need food?” Sarah smiled to soften her words. “I’m just thinking of you and the kids. I didn’t mean to burst your bubble.”

    Stunned, Jane contemplated her friend's remarks. Maybe keeping the day job was a good idea after all...

    c. Extra Ketchup, Flickr Creative Commons The fictional conversation above could take place on any given day. The best tip your family and friends will likely give you is to make sure you have enough money to support yourself and your family before you start a business. Sometimes that might mean that you have to continue working in a full time job as an employee, while you start your business on the side.

    It might mean that you have to run your business by day and then moonlight by night. You could drive a cab, deliver pizzas or be a waitress. You could sell shoes in Woolworth’s.

    That addresses the practical matter of finances. In the final analysis, the answer of finances can be addressed with: “Where there is a will, there is a way.” There are business grants. business loans, venture capitalists. There IS a way to get funding to buy a business – you will just have to find it.

    Another thing to consider is whether or not the business is suitable for you and your lifestyle. Are you physically able to do all that will be required of you. Are you mentally prepared for the extra responsibility? There is a reason why people say, “he or she is married to their business.” Sometimes, it feels like you cannot get away from it. The phone is ringing – text messages are coming in – emails pile up with edits, edits, more edits. That sort of thing.

    Okay, you’re mentally and physically prepared to handle running your own business. This is the “ideal” business for you and your lifestyle. And you can manage with your finances.

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    Evaluate The Small Business Before You Buy

    Now, you must evaluate the business very carefully so you will ensure you are getting a viable concern that will reward your labors. Even if it’s currently failing, you want it to show potential that you can work with.

    This involves:

    • The business’ profit and loss statements for the past two years, along with the balance sheet. You need to define the assets and liabilities of this company.
    • How much is the brand name worth – if anything?
    • Get a list of equipment, fixtures, supplies, client accounts, etc. which will come with the business. Then get a current estimate of their value from a competent evaluator.
    • Ask for details of any and all stock the owner will sell and how it will be counted and valued at the settlement.
    • You need a copy of the lease agreement or details of deeded property, liens and any disputes of title.
    • Does the business have existing employees? Are they planning to stay when the business changes hands or do you need to hire and train new employees? Are you obligated to keep any employees?
    • Is the owner willing to train you for an initial period?
    • If you want to buy a franchise, then obtain a copy of the Small Business Development corporation information sheets about franchising. Ask the seller to provide a copy of any existing agreements and the disclosure statement.

    Finally, while many businesses have been bought and sold just between two people, it is very prudent to have the assistance of trained professionals to guide you. Lawyers and commercial real estate brokers have a knowledge base that can help protect you. A commercial real estate broker can arrange a professional evaluation for you.

    Reduce your risk in every way you can through due diligence – then go full steam ahead with confidence.