Before You Buy or Open a Business
Starting or purchasing a business can be one of the largest financial commitments you ever make. Before investing your savings, signing agreements, borrowing money, or purchasing equipment, understand exactly what you are getting into.
Explore two separate, complete, free educational guides designed to help you evaluate opportunities, recognize potential risks, understand financial obligations, and make informed decisions.
Two Different Paths. One Important Goal.
Starting a business from the ground up and buying an established company involve different opportunities, financial commitments, and risks.
A new business requires a plan to develop customers, control costs, and establish a financial foundation. Purchasing an existing business requires the buyer to evaluate an established operation, verify its financial condition, understand existing obligations, and plan for an ownership transition.
Both require preparation, financial understanding, and appropriate decision-making.
We want you to understand the questions to ask, the documents to examine, and the risks to consider before committing your money.
Before You Open a Business
Having a skill, a promising idea, or years of industry experience does not automatically prepare someone to operate a business.
Before opening your doors, examine these essential areas.
1. Validate Your Business Idea
Identify your intended customers, understand their needs, research competitors, and evaluate whether sufficient demand exists.
2. Calculate Startup Costs
Account for equipment, tools, inventory, insurance, registration, professional services, technology, marketing, and working capital.
3. Understand Your Financial Numbers
Estimate operating expenses, calculate your break-even point, develop a pricing strategy, and determine whether realistic sales can support your financial obligations.
4. Review Legal Requirements
Identify applicable licensing, registration, insurance, taxation, and other requirements. Exact obligations depend on your business activity and operating location.
5. Evaluate Contracts Before Signing
Understand commercial leases, personal guarantees, equipment financing, supplier agreements, and ongoing payment obligations.
6. Prepare for Business Operations
Establish systems for bookkeeping, customer communication, scheduling, recordkeeping, inventory, and financial monitoring.
The full guide goes deeper into startup budgets, working capital, pricing, commercial leases, equipment, contracts, financing, taxes, scam awareness, and official resources.
Read the Complete Before You Open a Business Guide →Before You Buy a Business
Purchasing an established business may provide existing customers, equipment, employees, operating systems, and historical financial records. However, an established business can also carry financial obligations, operational weaknesses, and risks that are not immediately apparent.
A buyer should investigate the actual condition of the business and its finances before committing money or signing an agreement. Below are key areas to examine; the complete guide covers each in greater depth.
1Verify the Financial Records
Request appropriate financial documentation and have qualified professionals help you evaluate it.
- Historical profit-and-loss statements and balance sheets
- Business tax returns and bank statements
- Sales records, accounts receivable, and accounts payable
- Outstanding loans and other obligations
Look for consistency between reported earnings, tax records, bank activity, and the seller’s explanations.
2Understand What the Business Actually Earns
Learn how the seller calculates discretionary earnings, operating profit, and other financial performance measures. Seller’s Discretionary Earnings, or SDE, may include adjustments for certain owner-related expenses.
Those adjustments require careful review. The sales price does not prove what you can personally earn, and you may need to hire additional employees or management. What remains after paying the business’s obligations matters.
3Evaluate the Asking Price
Understand the assumptions behind the business valuation. Consider historical earnings, expected future performance, equipment condition, customer relationships, liabilities, and comparable transactions when relevant.
A seller’s asking price is not an independent determination of value.
4Investigate Debts and Other Obligations
Review relevant obligations and confirm which ones may transfer to you under the proposed transaction.
- Outstanding loans and unpaid taxes
- Supplier balances and pending legal disputes
- Contractual commitments and equipment leases
- Employee-related obligations
An appropriately qualified attorney and accountant can help evaluate these issues.
5Examine the Commercial Lease
If the business operates from leased property, investigate whether the lease can be assigned to you. Review rent, renewal provisions, additional charges, maintenance obligations, personal guarantees, and any required landlord approval.
Do not assume the existing lease automatically transfers with the business.
6Inspect Equipment and Inventory
Determine what equipment is included in the purchase and evaluate its condition, ownership, maintenance history, and remaining useful life.
Verify equipment titles, financing liens, and whether obsolete or unusable items are included in inventory valuations.
7Examine Customer Dependence
Determine whether a substantial portion of revenue depends on a small number of customers. Investigate whether customer relationships, key contracts, and recurring revenue will continue after ownership changes.
8Evaluate Employees and Management
Identify the people responsible for daily operations and determine whether critical employees are likely to remain after the sale. Understand applicable employment obligations and whether you have the experience or resources necessary to manage the business.
9Understand the Financing
Evaluate interest rates, repayment schedules, collateral, personal guarantees, and closing costs. Consider whether projected business cash flow can support debt payments while maintaining necessary operating resources.
Loan approval does not guarantee business performance.
10Prepare for the Ownership Transition
Develop a plan for customer communication, employees, suppliers, technology, training, operational responsibilities, and the transfer of necessary records and assets.
Determine whether additional training or transitional assistance from the seller is necessary.
Not every business offered for sale is appropriate for every buyer. Discovering financial problems, unfavorable obligations, or operational weaknesses during due diligence can provide the information needed to reconsider an acquisition. Choosing not to complete a transaction can be a responsible financial decision.
Read the Complete Before You Buy a Business Guide →Questions to Ask Before Committing Your Money
Starting a Business
- Who will buy my product or service?
- What will it cost to open?
- How much working capital will I need?
- How will I attract customers?
- What financial obligations am I accepting?
- Can I support myself while building the business?
Buying a Business
- Why is the owner selling?
- Can the reported earnings be verified?
- What does the asking price include?
- What liabilities could affect the purchase?
- Will customers and key employees remain?
- Can the business support acquisition debt?
Know When to Seek Professional Guidance
Educational resources can help you understand business concepts and prepare informed questions. They cannot replace professional advice tailored to your circumstances.
Depending on the transaction, consider consulting a qualified attorney, accountant, tax professional, insurance adviser, or independent valuation specialist. Understand each professional’s experience, fees, and responsibilities before engaging them.
Continue Your Free Business Education
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