What You Should Know Before You Buy That Small Business

Written by Cliff Ennico of Entrepreneur.com



There's no doubt that buying an existing small business is less risky than starting one from scratch. Why? Because, unlike a start-up:

• the business has equipment and inventory;

• the business already has a location, and maybe there's a few more years left on the lease;

• the business has employees, some of whom you may actually want to keep;

• the business has customers, most of whom probably will stick with you (unless this is a professional service business or practice); and

• most importantly, the business has a track record -- you can look at the business' books, records and tax returns and get some sense of how much money you will make.

But there's still risk. Whenever you buy an existing business and look at its records, you're looking at the past. There's no guarantee things won't change going forward. If you're negotiating to buy a business and you think the seller is giving you a great deal, be very suspicious -- there's probably something heading down the road at 90 miles an hour that will blow this business apart when it hits.

When doing your "due diligence" on a small business you want to buy, consider these five factors:

Demographic and political changes: If lots of business owners in town are looking to sell, there's a reason. How is the community changing? Is the population increasing, or declining? Is the population skewing older, or younger? Is a "miracle mile" shopping strip diverting traffic? Go to the local Planning and Development Office and see if there are any proposed zoning law changes that would change the "permitted use" at the business location.

Owner's Discretionary Income, or ODI: This is what the seller is taking out of the business after paying his suppliers, his employees, his rent, his overhead expenses and his taxes. If you can't live on the current ODI, or if ODI has been declining for several years, watch out! The business is going downhill. If the ODI seems healthy, get the seller to put it in writing, and hold back on naming your purchase price for a few months so you can confirm the seller's ODI numbers are accurate.