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What to consider before buying a business

On Behalf of | Feb 26, 2019 | Firm News

Texas is the land of opportunity and people transition in and out of business all the time here. This creates lots of potential for someone looking to invest in an existing company.

If you’ve identified a business, it’s important to complete your due diligence before making an offer. Take these considerations into account before any sale:

Reason for selling

This is perhaps the most important aspect of buying a business. Understand why the previous owner is interested in selling the company, and what prompted the sale. The common misconception is that a business for sale is risky, but that’s not always the case.

The current owner could be looking to move, to transfer into a different industry or simply retire altogether. But you won’t know unless you ask, and it should be one of the first questions you broach to any business owner. Why do they want to sell?

The potential for a non-compete clause

Most owners aren’t interested in starting over in a similar industry. However, it’s still important to get non-compete clauses from the previous owners. This ensures the past owners and their experience are not a threat to your newfound market.

If an owner is reluctant to sign a non-compete clause, it should be a major red flag for the transaction. Don’t give a previous owner capital to challenge your new investment.

Company standing and potential for growth

Determine where the company currently sits in terms of revenue versus expenses. Make sure that if the company is operating at a loss, you have identified the potential for correction.

If you are satisfied with the current financial standings, explore the potential for growth. Ask about any buildings and whether the company is locked into a lease or property agreement. Check the feasibility of moving locations, if necessary. Make sure the company has the flexibility to grow or evolve in the ways you view necessary to keep it viable.

Keeping contracts clear and binding

If you research a business and it’s a good fit for your needs, make sure solid contracts back the transaction. A knowledgeable attorney can help you draft sales agreements that keep everyone on the same page, as well as enforceable non-compete clauses and anything else you need to protect your new investment.