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Buying a Business from a Friend

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Tips for Buying a Business from a Friend

We get questions from time to time from individuals who are interested in buying a business from a friend but aren’t sure if they should.  If this sounds like you, then here are some tips on what you need to know and what questions to ask your friend, the existing owner, if you plan on buying an existing business from your friend. Buying a business from a friend isn’t any different than buying a business from a stranger.

1. Understand the company’s business model.  How has the company been selling their products to date?  How have those different sales methods worked for them?  Are there areas you can see where you can grow the business further if that’s your ultimate goal?

2. Understand the company’s profit and loss. Make sure you look at the Profit and Loss statement not just from this year but from the previous few years.  This will provide you with insight into the financials – which are the backbone – of the company including if what the current owner is saying is proving out to be true in the numbers.  If you’re not comfortable reading a P&L you should ask someone else to help you.

3. What equipment and/or inventory is transferable with the sale?

4. How much training is going to be included with the sale?  This is especially important for involved owners where you as the owner might be responsible for some of the production.  Even if the company has a staff, you need to make sure you understand all of the parts of this business if you want to be successful.

5. Are there any debts or liabilities that are being transferred with the sale?  This can happen in certain business transactions but you should make sure you understand what you’re getting into and make sure the purchase price reflects those risks you’re assuming.

6. Are the margins realistic and are the prices appropriate for the marketplace.  Someone may have a great concept but if they haven’t been able to make it pencil out numbers-wise then you need to ask yourself why and determine if there’s something you can do to change that.

7. Does this business and business model fit with your lifestyle?  Small business is notorious for its odd hours and hard work.  Even if you’re ready to undertake the work, make sure you understand how this business will fit into the rest of your lifestyle so that if you move forward it’s something that you love building for years to come.

This is, of course, not meant to be a complete list and you should certainly enlist the help of an expert at Florida Business Brokers, LLC throughout this process to make sure that you are financially and legally protected throughout the process.

Draw the Line

If you are buying a business from a friend, you must still take the steps necessary to ensure the deal is worthwhile and legal. You should draw a line between your personal interaction with your friend and the transaction of buying his business. Since a business is an investment, make sure you are investing money in an operation that is lucrative, or has the potential to provide you with a return on your investment.

Research the Business’s History and Finances

Before you seriously consider buying a business from a friend, find out as much as you can about it. Thoroughly review copies of the business’s certified financial records, including cash flow statements, balance sheets, accounts payable and receivable, employee files including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information.

This review (lawyers call it “due diligence”) will not only help you understand how the company ticks, but will alert you to potential problems. For instance, if a major contract like a lease prohibits you from taking it over without the landlord or other party’s permission, you won’t want to finalize the deal without getting that permission.

Don’t be shy about asking your friend for information about the business, and if they refuse to supply it, or if you find any misinformation, this may be a sign that you should look elsewhere.