Getting involved in business means taking risks. When you start a company, you run the risk of it not succeeding. When you buy a business, there are plenty of risks in that situation as well.
You can overextend yourself, meaning you don’t have the resources to maintain the company after making the purchase. There could be issues with the company or its assets that the seller does not disclose.
Whether you intend to invest a large amount of capital at once or to finance the purchase, you want to protect the investment you make. There are several ways that you can limit the risk that you take when purchasing an existing company.
Get help validating the valuation for the company’s assets
Perhaps the biggest risk when purchasing a company is committing yourself to a price that doesn’t represent the actual assets held by the company, its revenue and liabilities. You may need to negotiate with the seller to get terms that are fair and reasonable.
Having a professional you trust review and adjust the valuation provided by the company can give you some leverage when negotiating the cost and terms for the sale.
Request transition support as part of the purchase
You don’t know how this specific company operates or the exact daily tasks that the current executive or owner performs.
Even if they have a thorough, written succession plan to help you take over, you will likely benefit from having some of the management or executive team stay on for several weeks, if not a quarter or two. They can help you understand the flow of business operations and build relationships with the existing staff members, suppliers and clients.
Include contingencies when making an offer
A business purchase is a major transaction. When you make the offer, the price you propose will reflect your perceived value of the business. During the time between when you make the offer and when you conclude the sale, it’s possible that the information available to you will change.
Including contingencies that allow you to back out of the transaction without any financial losses can protect you. Common contingencies for business purchases include requirements for receiving financing, landlord or franchise approval from a third-party. You might also include a contingency based on whether skilled workers can secure visas or the value of the appraised property matching the offer you make.
Structuring your offer to protect yourself and negotiating appropriate terms in your purchase agreement can help limit your risks when buying an existing business.