Resales can be great but never forget the adage, “Let the buyer beware!”
As part of your due diligence, one of the most important bits of information you’ll want to make sure you know is why the present owner has decided to sell.
It’s a safe bet that this person knows their business quite well. If everything is rosy, why let it go? On the other hand, if they see storm clouds on the horizon, it may be the perfect time to sell because a potential buyer probably won’t see the approaching storm.
It may be that the existing owner is ready to retire and everything is fine with the business but remember that most people don’t put a wonderful and growing business up for sale.
When you research the franchise numbers and historical performance, look for trends–especially any downward trend. Spend a lot of time figuring out why any trend is going the wrong way and be very careful to discount any offered price by an amount that gives you lots of room for things to get worse.
One of the problems with tough times in a business (like our current recession) is that you just don’t know how long they will last or how low things may go.
On the plus side, buying an existing business can be great because you get immediate positive cash. In a new startup, you have to work for a while (sometimes quite a while) before you can start taking money out of the business. In a good resale, you should be able to do this immediately.
As a final note of warning, it is almost always a mistake to buy a resale that is losing money. The safest approach by far is to pay a premium for a business that is doing well and then try to make it even better.