Purchasing an existing small business can offer a more secure venture compared to starting one from scratch. However, it’s essential to be vigilant and watch out for potential red flags that could signal underlying issues. Here are some critical factors to consider before making your purchase:
Demographic and Political Changes
Assess the demographic and political landscape of the community where the business is located. Look into factors such as population trends, age demographics, and any proposed zoning law changes that could impact the business’s operations.
Owner’s Discretionary Income (ODI)
The Owner’s Discretionary Income (ODI) reflects the profit the seller takes home after covering all business expenses. Analyze the ODI closely to ensure it aligns with your financial expectations. Watch out for declining ODI over several years, which could indicate a declining business trajectory.
Proximity to Competitors
Evaluate the proximity of the business to major competitors, especially if it operates in the retail or service industry. Identify potential threats from franchise outlets or large retail chains that could pose significant competition in the future.
Sales Taxes
Be aware of any sales tax liabilities associated with the business. Ensure that the seller has fulfilled all state and local tax obligations to avoid potential legal repercussions. Consider obtaining a clearance certificate from the state tax authority to safeguard against future liabilities.
Local Business Reputation
Research the local business reputation through various sources, including newspapers, community engagement, and conversations with local residents. Look for any patterns of negative publicity or complaints against the current owner, which could indicate underlying issues with the business.
Taking the time to conduct thorough due diligence and research can help you make an informed decision and mitigate potential risks associated with purchasing a small business. Don’t hesitate to seek professional advice from attorneys, financial experts, and local authorities to ensure a smooth and successful acquisition process.
