How to Evaluate a Business to Buy

How to Evaluate a Business to Buy

As you can imagine, purchasing a business is one of the biggest decisions you will ever make. In fact, it is one of the most expensive commitments you will make in your lifetime. Therefore, choosing the right one is important. When you are looking to purchase a business, there are a number of factors to consider before making an offer. The first step, of course, is to think about the industry and type of business you would like to purchase. Secondly, hire a trustworthy and compatible business broker to lend expertise and guide you through the process. Furthermore, consider these 5 factors when evaluating a business to buy.

  1. Reputation
  2. Competition
  3. Current Market
  4. Owner’s Reason for Selling
  5. Customer Base
  6. Employee Satisfaction and Retention

Once you have found a potential business, ask yourself these very important questions.

  1. Is this business a manageable size for me?
  2. What are people in the community saying about this business?
  3. How much interaction does this business have with local competitors?
  4. Why is the owner selling? Are they retiring? Are profits down? What is the status of the current market?
  5. What are the company’s reviews? Are customers happy? Are employees smiling at the store or restaurant?

The main reason to ask yourself these questions is to determine if the business is worth the investment. There are a number of reasons why a business owner might sell but knowing can make or break a deal for you. For instance, if they are selling because a competitor opened up nearby and sales are down, chances are you will not have much better luck. Meanwhile, if the owner is selling because they are retiring and their children do not want to continue the legacy, it may have incredible customer retention and incredibly loyal staff.

Of course, once you have found a business that interests you, the next step is to request financial information. Have profits been rising? What has been the cash flow for the last two years? How depreciated is the equipment? These questions will help you determine if the asking price is one you are comfortable negotiating.

At the negotiation stage, you can ask your broker any and all questions you may have. It is their responsibility to guide you through the process and help you make the right moves. Your next business purchase may be right around the corner.

Contact your local Transworld Business Advisors office for a free consultation and to take the first step toward your next investment!