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Steps to take before you buy an existing business

On Behalf of | May 4, 2020 | Business Litigation |

Maybe you come into some liquid capital and want to turn it into a lasting source of income. Perhaps you already have a business and you want to expand or have thoughts about moving into a completely different industry niche. 

Whether your intentions involve buying out a competitor for purchasing an existing brand to help you establish a market as soon as possible, buying an existing business can be a great way to get into business without starting from scratch. However, there are certain things you should do before you make such a significant investment.

Do your due diligence regarding the industry

Only a few years before they completely went under, a certain massive movie rental chain was an industry leader with brand-name recognition almost everywhere. As the market began to shift toward digital content and cheaper rental options meant DVDs and Blu-rays no longer had the prestige to command a price premium, the company could no longer maintain its existing business model and prices. 

An industry experiencing growth right now may have short-term success or maybe an exception in an industry that is floundering. Looking at current industry performance and projections can help you determine whether you want to get involved in this area of business at all.

Verify the business’s financial figures and assets

During negotiations for a business sale, the current owner will likely provide you with documentation regarding its assets and liabilities. They will also likely show you their current sales or income and their projections for the future growth of the company. 

You should not take those figures at surface value. Verifying the information provided to you by a business during sales negotiations can help you reduce the risk of someone taking advantage of you by manipulating the numbers.

Make sure you have protections in your contract

As with any major purchase, including contingencies that allow you to back out of the purchase prior to its completion due to unfavorable circumstances will protect you and your capital as you move forward with the purchase of an existing business. 

Ask for the seller to help with the transition so that you can better understand the flow of operations and get to know the staff. The more carefully you explore the situation before you finalize anything, the better you’ll be able to protect yourself and your investment capital.