How To Reduce Risks When Buying A Business

It is often said that the safest way to start a business is by buying one, instead of starting one. However, this may not be true. In reality, Business start-ups have the highest failure rate, both the new and purchased. This could happen because the new owner still doesn’t have proper plan and preparation. However, if our ideas and business are well thought out, then it is possible that we will have much better chance for success. The odds should improve if we surround ourselves with experienced professionals and do proper planning. Obviously, we won’t go to the cheapest doctor, because our health is the top priority. Whether we start from scratch or buy a new one, we should keep in mind that it is important to have proper planning. It is also a good idea to choose safer options, such as starting small. We may work part time initially, if we still have our primary job. If we go a safer route, we will be able to eliminate possible risks, related to failing business.

Many of us can’t afford to buy a business and choose to take on debt. Debt is a good thing only if it is certain that the business we want to buy can really offer us steady profit. However, most of the time, we can’t be sure. It should be noted that after we cover all the costs of purchase and operations, we still need to re-pay the debt, including its interest rate. This will add an element of risk and if there’s a downturn in our industry or market, it is possible that we will be out of business. Debts also restrict our options we may otherwise have. In fact, borrowers can be cash cows for lenders, if they can only make minimum payments. This doesn’t sound good because we start a business to avoid the slave wage. Buying a business that may not give us enough profit, because we need to repay the debt may not be a good thing to do. Debt is acceptable only if we want to buy a well-established business in the right locations and market. We should be able to purchase it at a reasonable price and the projected monthly profit is much higher than the required monthly debt repayment.

We should avoid buying a business based only on promise of the future potentials. Sellers will try to convince us about the huge opportunity if we purchase the business. In reality, such a promise hasn’t yet fulfilled. If we fail to achieve the projected goal, the seller may simply put the blame on the market situation or even our inability and lack of experience. That said, it is important to review the detailed financial information of the company to see whether it has already produced sizable income. We should also know that the revenue is sustainable. We should interview current customers of the company to know whether they are willing to do long-term business after the change of ownership.