How to Buy a Small Business – Critical Risk Factors and Analysis of Buying a Small Business

Buying a Small Business is an exciting option but it can also be very risky. There are some critical factors which need to be taken into account during the business buying process.

It is helpful to have an accurate system of calculating risk factors and understanding their meaning to determine the right business for you.

Here are some risk factors to consider, associated with buying a small business:

1) Expected growth/Industry growth

2) Sales growth in business in the last three years and estimated future growth

3) The consistency and quality of earning

4) Degree and strength of competition

5) Location suitability

6) Present number of suppliers

7) Number of customers

8) Employee stability and quality

9) Entry level difficulties for new entrants

10) The time since the business was established

When looking at small businesses you are interested, it is wise to seek the services of a professional lawyer or a business accountant. Always make an analysis before buying a small business such as:

1) The new business opportunity should fulfill expectations

2) The returns should be in proportion to the hours spent on business activities

3) Find out the reasons the business is for sale

4) The growth probability should be high

5) An exit strategy should be planned in case things do not work

6) Find out whether any marketing strategy exists for the business or there is a need to develop one

7) The buyer should understand the cash flow requirements of the business in advance

8) The capital needed to begin operations should be determined in advance and arrangement of funds should be made accordingly

9) The accountant should always be asked to make the study of previous tax returns

Understanding how to buy a business using reliable, expert information will help you in making the right decision while buying a small business.

Tip: Your skills should match the business you are buying.

After Handover:
Small business owners may need to put more efforts into the business at least in the beginning. The business becomes less dependent on the owner as it develops.

Assets & Liabilities:
All the assets and liabilities associated with business should be known to calculate the net worth. The bank must be approached with all the information and inquiries must be made about the amount that can be borrowed to finance a deal.

Inventory:
The inventories list should be checked for any obsolete material before buying a small business.

A quick initial business evaluation has to be done to check whether the business is worthwhile pursuing. A comprehensive checklist is highly recommended to help every step of the way.

Tip: It is a huge advantage to understand and know the true value of any small business you are looking to buy. While many business buyers automatically head to a business broker or business valuation practitioner, they are unaware that the same information can be sourced for free or a fraction of the cost and often provides more information specifically with the business buyer in mind.