3 Things to Know Before Buying a Business

Everybody wants to gain financial freedom, but only a few people know that the best way to do so is to establish a business. Even fewer are willing and able to start a business from scratch, as this entails that they’re going to have to handle things like business models, marketing strategies and campaigns, products, employees, and logistics. Why go through all that when you can simply buy it from someone who’s already laid down the roots?

However, this isn’t a guarantee that you’re going to profit from the purchase. In many ways, buying a business may even be riskier than building one. Here are some things to consider in order to mitigate that risk.

Stability vs Potential Growth

Before buying a business, investors need to consider whether they want to buy a business that’s already been able to establish its reputation, or a business that’s very likely to grow substantially. Successful businesses tend to cost significantly more, but they also have stability in terms of profit and customer loyalty. Successful businesses also benefit from their brand reputation.

On the other hand, while a growing business is a significantly riskier purchase, there’s much more to gain, not just because of the much lower cost of acquisition, but also because these businesses can be potentially disruptive. The likelihood of an investor being able to improve a growing business to such a extent really boils down to the investor’s mastery and knowledge over the industry that the business operates in.

Buying Shares vs Buying Assets

Another thing to consider is whether to purchase shares or assets. This is important because it can determine your level of exposure to legal liabilities. Buying business shares effectively means that the investor becomes the new owner while the business retains its status as its own legal entity. All debts and liabilities also become the new owner’s responsibility.

On the other hand, an asset purchase means that the investors gain ownership of business assets such as vehicles, warehouses, equipment, client records, and inventory. They can then register the business as a separate legal entity under a different business name.

Overall, an asset purchase is the safer option if the business has unmanageable debts and obligations. A stock purchase is the better option if the business has a reputation that’s difficult to re establish under a different identity.

Due Diligence

Finally, it’s important to take a thorough accounting of the business you plan to buy. This entails tasks such as performing an exhaustive asset search, as well as all debts, liabilities, security history, and many more. Cybersecurity is an especially important aspect considering that when you purchase a business, you also purchase their data. Compromised data is no good in the digital world, not just because of the data leak itself, but it’s also a sign that particular business is vulnerable.

There are many other factors to consider when purchasing a business, but these are the three guiding principles that will keep you from getting lost in the complexities involved.