Buying an existing business can be a great investment and a fine way to become an entrepreneur. When done right, it reduces risk and is a fairly predictable path to success. That said, however, there are times when buying a business is not such a good idea.
Here are the top five reasons:
I bet you can think of a location in your area that has gone through business after business in the past few years. Some locations are just jinxed. Similarly, some businesses, no matter how hard the owner works, simply can’t get ahead.
Others business have poor locations, bad reputations, outdated inventory, negative cash flow or a slew of neagtive reviews online. If the main thing that is attractive about the business is the asking price, run, don't walk, away!
2. Cost issues
The cost of running the proposed business cannot be too high and you need to be assured that the costs will remain fairly stable. For example, I have a friend who runs a business that is highly energy dependent. The recent surge in gas prices has eaten into his profit margin pretty substantially. Beware of that sort of issue.
By the same token, you also need to be aware if there are competitors who have a significant cost advantage over the business you are looking at. Competing against a Big Box retailer, for example, is difficult because it costs them much less to buy a product. If you don’t heed this warning, your potential business will always be vulnerable to price wars.
3. Obsolete equipment
If you are considering buying a business that is dependent upon machines or technology—especially cutting-edge technology—make sure that what you are buying will work for the next few years. You don’t want to buy a business where the owner has realized that his business is losing its technological edge, does not want the expense of getting back up to speed, and so is selling before the downturn is too noticeable.
Indeed, the last thing you want is a business that will require a substantial financial infusion to remain competitive. Be sure that the machinery, technology, computers and software are all fairly new.
4. It's too good to be true
You know you should beware when the price of the business seems far too low, the owner is exceptionally eager to help you get in, or he or she is willing to do whatever it takes so as to move it fast (when speed becomes more important than price, something is definitely wrong.)
You know the old saying: If something is too good to be true, it probably is.
Too many businesses for sale simply do not make enough money to be a viable investment, the location is wrong, or something else makes the deal not what it appears. You must be sure that the business is in fact making sufficient money before you buy into it. Always take the books to your accountant.
5. The competition is too stiff
Of course, competition will be out there; that’s the nature of the game. But you do not want to get involved in a business or industry that is too competitive. It may be that there are too many similar businesses out there or that the cut-throat nature of the competition makes your potential profit too slim.
Whatever the case, be sure that you are not getting involved in a situation where there are too many businesses chasing too little profit.