5 Questions to Ask When Thinking About Buying a Business

5 Questions to Ask When Thinking About Buying a Business

August 2, 2016

So You Want to Buy a Business?

I have assisted with many business acquisitions over my decades practicing business law, most of it focused on business transactions.

Along the way, I have helped literally dozens of clients and budding entrepreneurs acquire their first businesses.  In most of these cases, I also helped the client identify the acquisition opportunity.

I list below a few questions I have for anyone looking to buy a business:

1. Why are you looking to buy a business?

Many who work for other people hate their jobs or hate their bosses, or both. But this is not a sufficient reason to buy a business.

I don’t think it makes any sense whatsoever to buy a business unless you feel you have both the relevant skills and a genuine passion to own and operate your chosen business. Nothing less will do.

A desire to make more money than you currently earn is also not an adequate or sufficient reason to buy a business.  While I believe that almost all of the clients I helped to buy a business had a higher after-tax income with their new businesses than they would have had working for someone else, there is certainly no guarantee that this will be the case.

2. What type of business are you looking to acquire and why?

Over the years, many people have come to me and have told me that they wanted to buy a business. Yet most had little to no idea what business–or even what type of business–they wanted to buy.

Many of these folks ultimately found a business to purchase and prospered with the acquired business. However, I don’t recommend that anyone set out to buy a business unless they have some idea of what type of business they might best understand and how they will add value to it. And perhaps, if this isn’t asking too much, to have a genuine passion for the kind of business they want to buy.

3. How do you propose to identify a suitable acquisition opportunity? In other words, how do you intend to find a business to buy?

I have heard that the rule of thumb is allow two full years to find a business to buy.

Let’s face it, many of the people looking to buy a business have little to no experience finding businesses, so they face a very long learning curve. Most people who want to buy a business don’t want to pay a professional finder to do the scouting work, because they plan to use whatever money they have to pay their bills while they do this work themselves. Frankly, they may have no idea what is involved and how ill-prepared they are to search for business opportunities! I therefore recommend that the prospective buyer plan on the process taking two full years or else hire a professional business finder.

There are of course exceptions to the rule.

I can think off the top of my head of two groups that were recently able to acquire a business quickly when I made the introduction of the buyer to the deal and the seller. After I introduced them to the sellers of their respective companies, Scott Lowry was able to purchase Fathom, and Rick Martinko and Ron Zieske bought Heatseal.

4. Do you have sufficient resources and credit to afford the business you seek to acquire?

If you are going to set out to buy a business, you need to have enough money in the bank both to pay your bills while you search for the business to buy, typically two years, and then to buy the business after you find it.

If you start down the road of buying a business without adequate resources, either you will be forced to halt the search process before you find a company to buy or you will find a company to buy, but not be able to finance the acquisition.

I encourage prospective buyers to be realistic in assessing and determining whether they have adequate resources to make an acquisition.

One way around this is to do what Ron Zieske did. I introduced Ron to Rick Martinko, and then I found the right deal for the two of them to buy. It is unclear that Zieske would have been able to participate in an acquisition without partnering with Martinko, and it is entirely unclear whether either of them would have ever acquired a business had I not delivered the Heatseal opportunity to them.

5. Are you and your family prepared to take the risks associated with business ownership?

If you plan to buy a business, you should plan to sign personally for loans or notes to be held by the seller or whomever provides you with financing.

In all likelihood, you may have to put up your house as collateral.  This will require your spouse to cosign if you are married.

Not all people who buy businesses–not even all first-time buyers–will be made to sign personal guarantees. However, enough financings require a personal guarantee that you should not set out to buy a business unless you are willing to sign personally and undertake the associated risks.

For most of my business acquirer clients, buying a business was likely the best thing to ever happen to them professionally, financially, and personally.  This is especially true for my clients that bought their first business with me.  But let’s never ignore the fact that there are risks involved in buying a business and not every business acquisition is a home run for the buyer – even though it often seems that way.

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