Buying a small business is one way to invest your money and earn future profits. However, purchasing a business is also risky. You stand to lose everything if the company can't compete and perform up to expectations. Before buying a business, it is important to consider many factors as part of a diligent, fiscally responsible process.
Research the Industry
Once you identify a business that you might like to buy, learn about the industry in which it operates. Even if you think you understand the playing field, it is essential that you know about the competitors, customers and prospects for future growth to know the context in which the business exists. Verify that the industry has growth potential and an adequate or expanding customer base. This will mean more room for your business to grow and your investment to turn into profit.
Letter of Intent
A letter of intent, or LOI, is a document that you and the current business owner draw up to aid in future negotiations. You'll want to work with a contract attorney when writing a letter of intent, since the terms of the letter may affect how much you're willing to pay or whether you want to buy the business in the first place. A LOI is not a legally binding document, but is the first step in expressing your formal interest. It is also an important gauge of how the rest of the purchasing process is likely to proceed.
Perform an Audit
An audit will tell you everything you need to know about the financial situation of the business and its position within the industry. A certified public accountant can perform the audit, or you can hire a consulting firm to assemble a detailed report. The result of the audit should be a list that includes the firm's assets, its liabilities and its financial commitments to customers, payroll and suppliers.
Financial Projections
From the audit information, perform financial projections that estimate the future value of the business. While there is no way to measure a company's anticipated growth precisely, you can get a general sense of its potential short- and long-term growth.
Secure Financing
Before committing to buy, secure financing for your purchase. This may mean seeking private investors or getting a small business loan from a lender. In either case, the audit, along with your projections and business plan, will determine who is willing to invest, and how much.
