I have received many questions from clients who want to either buy an existing business or start a new one.
My job as a Small Business Consultant obligates me to tell the truth which sometimes is something that my clients do not want to hear.
As unstable as the economy is right now, I do not advise to start a business or even buy an existing one which in turn might be deep in debt or is not producing enough income to survive.
We also have to consider that there are a lot of unscrupulous people who take advantage of the innocence of someone else who has the desire to succeed and who plainly lie about the real financials of their business.
To avoid becoming a victim, make sure the business owner or broker who are negotiating the sale, provides you with information regarding the current and past income and profit figures of the business through monthly or annual reports, which are usually prepared and audited by a CPA or an Accountant. If so, make sure that the Accountant/CPA that prepared these reports has an established and honest business.
You also have the right to verify the numbers on the reports by comparing the information reported on the statements filed with your local State Tax Revenue Office and the Annual Federal Tax Returns. If the seller or broker hesitate to show you all these documents, then this is NOT a good business to buy and I do NOT recommend that you invest a single penny but will recomend for you to take your money elsewhere.
If you are really interested in purchasing a business, it would be good business decision to have an expert analyze the Fair Market Value of it so you have a base price to negotiate with for a fair and just offer, but please understand that you will probably have to incur the expense for the appraisal.
If the owner/broker proposes a partial payment on the sale – so you can take over the business right away – and pay the rest in installments or on a balloon payment after a set date, make sure this person does not have any pending tax debts with the local state/sales tax revenue office, assessors or providers, because – even if they say the opposite – once you take over, you are completely responsible to pay all debts that this business has.
There are ways to find out if there are unpaid debts through an escrow company or by you.
The option of starting a new business on your own is less complicated and all you need is Capital, but don’t add a second mortgage on your real estate assets or take on a bank loan unless you are backed up by some fixed income from another source that is going to cover your day to day principal needs so you are not dependent on the income from your new venture to survive.
Without Capital you are going to get deeper in debt and end up bankrupt.
My advice is to have at least five months of rent payments and at least fifty percent of one year of operating projected budget saved in your bank checking account.
Once you have the Capital back up, is your job to make sure the property/lease space you are going to rent is authorized by your local zoning and planning department so you don’t run into walls trying to get a business license approved, so make sure you take care of this before you even sign a lease.
Don’t forget that the better informed you are before you start a business, the more asserted your decision will be and there will also be less of a possibility to make mistakes that can cost you lots of money and even the possibility of losing your children’s only patrimony.