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7 Questions to Ask Before You Buy A Business

Posted by Kevin Freeman

Mon, Feb 02, 2015 @12:41 PM

You’re seriously considering buying a business.
It’s an exciting and sometimes stressful time. You’re ready to tackle your next challenge head-on and this new business may just be the biggest yet. But, before you get the process going, you need to ask yourself some pretty tough questions to make sure you’re really ready.

In order to help you better prepare for the purchase, answer the seven questions below. With a little insider knowledge and homework on your part, you’ll be on your way to a less stressful, more profitable and rewarding transaction.


1. Am I ready to be an entrepreneur?

This is the question most buyers ask themselves first and foremost. The answer to that question can be found by answering a few questions first:

• Am I tired of working for someone else?
• Shouldn’t I work for myself rather than make someone else rich?
• Do I want the freedom to make my own decisions and control my own destiny?

If you answered yes to these questions above, you are ready to take the next step towards owning your business.


2. Do I have the necessary funds for the down payment?

In order to purchase any business you will need a down payment. A down payment can range from $25,000 to $1,000,000 depending on the price of the business. A good rule of thumb is to figure on having at least 25% of the purchase price for a down payment. If only seller financing is available, 35% may be more realistic. Either way, it will be necessary to have funds ready and available when you make an offer to purchase a business.


3. Do I have 3 years of tax returns to use for financing?

Banks and private/seller financing will always require your personal financial documents to be examined before determining your ability to borrow funds for your business purchase. It is very important that you keep a file containing your tax returns, including all schedules, readily available upon request. Your tax returns will be the key tool when assessing your ability to borrow.


4. Have I checked my credit score?

Just like your tax returns, a bank or private financing source will want to check your credit to make sure you have the necessary credit history to repay the loan in a timely fashion. If your credit score is below 650 from any of the three (3) major credit bureaus, you might try to raise your score prior to applying for a business loan. Your credit score can be checked by going to www.experian.com.


5. Do I have a financial statement prepared for the broker?

A financial statement is a great tool to use when beginning the purchase process. It will be the one form that can be sent to your business broker, your banker, and to the seller when making an offer to purchase. Sellers like to consider things like net worth and liquidity when deciding which offer to accept.


6. Am I prepared to sign a buyer’s confidentiality agreement?

A confidentiality agreement or non-disclosure agreement is necessary to begin the search for a business to purchase. All prospective buyers will be required to sign one of these forms stating that they will not disclose any of the confidential or proprietary information that they receive. This confidentiality is paramount in the search process. However, the sharing of information with advisors such as accountants and lawyers is an acceptable practice and does not breach the confidentiality agreement.


7. Do I have an advisory team to assist with the transaction including a CPA, attorney, and financial planner?

Virtually every buyer is represented by a business broker to assist in the search for a business, an accountant to assist in the due diligence process, and an attorney to draw up and review the legal documents. Many buyers have business relationships with these types of professionals, but many times the advisors are not transaction-based. In the event that your accountant or attorney is not transaction-based, Stony Hill Business Brokers can refer several professionals from which you can choose.


At Stony Hill, we will provide you with answers like these and a lot more to help you prepare yourself to buy a business. With our consultative approach and knowledgeable background, Stony Hill Business Brokers is the partner every entrepreneur should have. Contact us today and one of our advisors will begin the process so you can begin the journey of buying your business with confidence.

Topics: Buying a Business