Six Tips for Buying or Expanding a Business

Owning a business is the American dream and, in most cases, it is the best vehicle for achieving long-term financial freedom. Yet, countless small business owners sabotage their efforts to reach this goal because they are unorganized, under-funded and/or lack a detailed business plan. Before embarking on the purchase of a business or the expansion of an existing one, consider this sound advice from experienced investment management professionals.

1. Spend Time in the Trenches. Thoroughly

examine a business before purchasing it. Gather information through Internet and library research and conduct market research on the general health of the market sector. Determine the market trends to see whether or not the industry is oversaturated with competition. Then, look at the direction in which the prospective company is headed, and evaluate how the company is performing in comparison to competitors.

Additionally, visit the company or similar organization and observe its working processes. Pay attention to both the employees and customers during work-related interactions. Solicit input from employees and owners to assess satisfaction with both the company and the product(s) or services.

2. Create a Sound Business Plan. Most financial institutions and other investors will not provide funding without seeing a solid business plan. That's why it's essential to create a plan that reflects the business' overall concept and goals.

The plan should include various econometric models to provide accurate business benchmarks. There are many resources available to assist in preparing a business plan, including the Small Business Administration (SBA), small business investment companies, business development companies, CPAs and attorneys, as well as friends and family who have had success in business.

3. Secure Working Capital and Back-up Resources. Many small businesses are largely under-funded, which is the primary reason why they fail. Determine the business budget, how much capital and other financial resources exist for investing in buying a new business or the expansion of an existing one and potential sources of capital.

Ensure that the PAYDEX Score--a scoring system from Dun & Bradstreet based on how well a company pays its bills--is as high as possible to assist with lending. Examine whether to use seller financing (if offered) or a conventional loan to purchase the company. Meet with local lenders, and visit the SBA website at www.sba.gov for more information on types of loans available.

If purchasing a franchise, don't automatically assume that the franchisor will take care of the financing. If expanding a business, seek out creative financing options if the traditional ones are not successful. Also, make sure financial needs are in line with the business plan. Lastly, acquire or seek out the knowledge required to manage both the business and its resources.

4. Invest in a Strong Brand/Image. The company's image is as important as the quality of its products or services. Does the product "packaging" (including advertising, marketing, positioning, branding, vision, mission and values) garner respect? Are these elements consistently presented and delivered? What is the company's overall experience? Will extensive re-work and/or remodeling need to be done?

If the company is a franchise, there are additional details to consider. For example, determine how extensive the training is and if it is available for employees, too. Is there regular communication between the franchisor and franchisees, including regional or national meetings? What are the future expansion plans and profitability projections?

5. Keep Accurate and Complete Records. Becoming a business owner demands attention to detail, especially when it comes to keeping records pertaining to financial, clients, products and personnel information. Carefully track, monitor and evaluate data using reliable technology. Access to information demonstrates the organizational skills and competence necessary to present the investment and business plan to the potential investors and the financial community.

6. Make a Profit. Sounds obvious, and certainly this is the goal of any business owner. When examining a business to purchase or determining whether to expand, scrutinize previous income statements, balance sheets and tax returns. Compare these with future budgets and forecasts. If purchasing a new franchise, this information should be provided from a location with similar clientele characteristics. Account for all revenue, expenses, possible losses, shrinkage and unanticipated costs to project the business cash flow.

Jeff Stone is Managing Director with Crescent Fund LLC (www.crescentfund.com), a Wall Street private equity and consulting firm providing corporate capitalization and investor relations consulting services. He can be reached at 212.509.3060.