Checklist: What to Do BEFORE You Buy a Business
by Laura Dobbins | Researching
Buying a business can feel like you’re standing in the middle of a hurricane. Industry jargon, paperwork, calculations and phone calls all swirling around you at high speed. It’s hard to make heads or tails of it sometimes.
Approaching the process logically, and knowing what to cross off the list before you even consider purchasing a business is critical. It’s fine to window shop and see what businesses are up for sale at the moment (we did that too), but take time to get some “housekeeping” done before you pick up your checkbook my friend.
[Note: I didn’t mean housekeeping literally, by the way. I’m not asking you to do the dishes before buying a business. Now that we’ve cleared that up, moving on…]
STEP ONE – Should You Be a Business Owner?
First, if you haven’t already, check out our article on whether being a business owner is right for you. This should be Step One, without a doubt. You may discover that your temperament is not suited to being your own boss, or maybe you’re not a details person.
If you find that business ownership may not be your cup of tea, don’t sweat it and don’t be hard on yourself. We all have strengths and weaknesses, and owning a business is not for everyone. Instead, take that fire in your belly and put it towards finding what is right for you.
Or, if you’ve read through our description of what makes a great business owner, and believe we’ve just described you, then by all means, forge ahead to Step Two.
STEP TWO – Take a Look at Your Finances
This should go without saying, but you need to have a pretty solid grip of where you are financially if you’re going to buy a business. You don’t have to get all your financial figures together just yet, but you should at least have a rough idea.
- What debts do you have?
- What kind of savings do you have in the bank?
- If you don’t have much savings, do you at least have an emergency fund?
- Do you have access to other funds such as retirement or investment accounts?
- Is your net worth negative or positive? (Click here for a definition and to use the same FREE calculator we use and recommend.)
- How is your credit?
You don’t need to be rich to buy a business, but having some money set aside is a very good idea. Having a decent (650+) credit score doesn’t hurt either.
Calculate how much debt you have, how much money you have available to put towards the purchase, and your net worth. If you don’t like what you see, then consider waiting until your financial picture is a little brighter before moving forward. (We spent a little over a year putting some money aside and earning extra income.)
STEP THREE – Check Your Credit Report
Speaking of credit, it’s a great time to check your credit report and verify that everything is accurate. If you find an inaccuracy, it can often take several months for the correction to appear in your report, so don’t delay.
Did you know that the Fair Credit Reporting Act requires that each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — provide you with a FREE copy of your credit report, at your request, once every 12 months? You can find the official website at AnnualCreditReport.com.
Review them all carefully and submit corrections ASAP.
STEP FOUR – Determine Your Target Purchase Price
Lastly, before you start reaching out to sellers and brokers, you should have an approximate range in mind for purchase price. There’s no sense in pursuing a $500,000 laundromat when you should be looking in the $200,000 range.
In Step Two, you were instructed to start gathering your financial information. By this point you should have an idea of the cash available that you can put towards a down payment, closing costs, etc.
A typical down payment requirement for a lender-financed purchase is 35%.
First, you should have $20,000 set aside for start-up expenses (utility deposits, rent deposit, closing costs) and start-up cash (you don’t want $0 in your business account on Day 1.)
Then, based on the amount you have left for a down payment, determine what purchase price is in your range. For example, if you have $50,000 left for a down payment, that is 35% of a purchase price of $142,857.
Example: 50,000 / 0.35 = $142,857
Now you can calculate your own target purchase price by dividing your available down payment by 0.35 (or .25 for 25% or .30 for 30%, etc, etc).
At this point, you should have at least a basic understanding of your financial situation, and a fairly good estimate of your target purchase price. Continue your research until you feel comfortable with the laundry industry and then you’re ready to start finding a laundry of your own…happy hunting!
About Laura Dobbins
Laura is the founder and co-creator of Laundromats101.com, and owner of two laundromats in the Sacramento area. She’s a math geek (Calculus III was a breeze), and currently works as an Analytics Manager in the Healthcare Finance sector. When she’s not busy analyzing something, she loves cooking French food and blogging.
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