South-Western - Management  
The Trouble With Buying a Business
Topic Entrepreneurship
Key Words Small business, entrepreneurship, risk
News Story

Since the stock market picked up in the summer of 2003, owners of businesses are feeling more confident about getting a good price for their business and many are putting them up for sale. Some would-be entrepreneurs see these existing businesses as being less risky than starting a new one from the ground up. However, the potential for making mistakes when purchasing an existing business is great and can pose a great risk to potential buyers unless they are prepared with a plan to carefully assess the business' health before deciding to buy.

Francis McGuckin, chief executive of SmallBizPro.com offers the following advice to help keep entrepreneurs from losing their shirts in these situations:

  1. Try to figure out if the business is worth the sticker price: A client of Ms. McGuckin fell in love with a scrapbooking business and wanted to purchase it for the price of $80,000. After examining the business' revenue closely, they discovered the owner was only clearing about $1,000 a month, while working seven days a week. The would-be entrepreneur decided not to purchase the business. Another prospective small business owner tells of looking at a sporting goods shop that was offered for the price of $40,000. After looking at the inventory in the store more closely, he determined that a lot of the product was obsolete and worthless, making the stated value of the business much lower than he had originally thought. To avoid surprises of this kind, potential buyers should hire a certified public accountant who will look at two years of financial records and analyze the business' cash flow, outstanding debts, and earning potential. It is also important to steer clear of businesses that do not keep good financial records, or who claim to make more money than they show on their tax returns.
  2. Hire a lawyer to detect any legal problems related to pending litigation against the company or lease problems.
  3. Spend as much time at the business as possible before buying: Some good ways to get a realistic picture of the business' health is to interview current employees and ask them how the business is doing. They will probably present a more balanced picture than the owner who is trying to sell. Also ask the seller to provide a list of top clients and interview them as well to get their feedback. Finally, it is a good idea to work at the business for at least a few months before taking it over.

Questions
1.

What are some of the possible risks involved with taking over a business that has been previously run by someone else?

2.

Name three important steps to consider before purchasing an existing business as an entrepreneur.

3.

What are some of the pros and cons of being a small business owner?

4.

Read about the different approaches to risk strategy in your text. Does this article take a risk-avoiding or risk-seeking strategy? Why is this approach prudent under the circumstances?

Source "The Trouble With Buying a Business," The New York Times, Sept. 16, 2004.
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