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By Sanjeev Kumar
Founding Attorney

Setting out to buy a small business is an exciting adventure. For those with the entrepreneurial spirit, buying a small business can be the culmination of pursuing a life-long dream. Buying an existing small business can be an excellent investment. If you fail to do your due diligence prior to this major purchase, however, things can quickly go south. Be thoughtful and detailed in your review of a small business you are looking to purchase. Diligence up front can save you a lot of time, money, and heartache further down the road. 

What Should I Look for When Buying a Small Business?

First, you need to decide on what kind of business you are looking for. If you want a business in a particular location or a business that is in a specific industry, use this to narrow down your search. Consider things such as what industry arenas you have developed an expertise in. Also, consider the lifestyle you have or the lifestyle you want. Do you want to work normal business hours or a different schedule? Different industries lend themselves to different hours of operation. Once you have settled on what kind of business you want, you can really get into searching what is on the market.

When you have selected a business that meets the above criteria, it is really time to start looking into the details of that business. Learn everything you can about the finances of the business. Ask the current owners for the following documents in order to review them:

  • Balance sheets
  • Profit and loss statements
  • Tax returns
  • Sales tax
  • Accounts payable and receivable 

Also, request a list of the business debts. This is especially important if any creditors have lien on any assets of the business meaning they have a security interest in them. All of this will give you a gauge for the financial health of the business. Ask the owner why he or she is selling the business. If there is a declining market for this kind of business or it is proving difficult to keep up with the bigger stores in the industry, you might want to take this into consideration.

Next, check out the physical assets that may be included in the purchase of the business. If there will be any equipment involved in the sale, get a professional inspection to verify whether it is all in working order. Review any inventory as well to see whether it is up to date and whether it is something that you can reasonably expect to sell.

Take special care to review the terms of the lease and consider hiring a professional such as an attorney to review it as well. The lease will lock you into or out of certain things that can have a huge impact on your business. In particular, look to the term of the lease. How long is the lease for? See if there will be an option to renew and what kind of restrictions are placed on businesses leasing the space. Also, check to see that you are able to take over the existing lease from the current owners.

If you have found the business that is the right fit for you, you are going to need funding to purchase it. Purchasing an existing business can be costly. If you have your own money to purchase it, then you are all set. For many, this is not an option and so other financing options must be explored. You may need to look into securing a business loan. In the alternative, you could look for an angel investor or venture capital.  

Texas Legal Counsel Helping You Buy a Business that is Right for You

The Kumar Law Firm is proud to serve those setting out on the journey to small business ownership. We provided trusted business law

About the Author
Sanjeev Kumar is the founder and principal at the Kumar Law Firm, which provides a wide range of legal services to entrepreneurs and business owners in the area of business & corporate law and intellectual property along with related areas of interest to clients such as business succession planning, wealth preservation through estate planning, and alternate dispute resolution.