In my last column, I talked about preliminary planning and research if you’re considering starting a new business. What if you’re thinking about buying an existing business?

First of all, my three basic rules for buying a business: (a) let the buyer beware; (b) if it sounds too good to be true, it probably is; and (c) take your time and if someone beats you to it, just write it off as “it wasn’t meant to be.” Remember: If you have the opportunity to buy a business, it’s because the present owner wants to sell it. You have the dual challenge of figuring out not only how the business is likely to do in the future, but also the true reason the present owner wants out.

As with starting a new business, the first step in buying one is to research the industry to be sure you really understand how it works and what is going on there. The business you’re thinking about buying may be doing well, but even so, it is operating in a dynamic environment and it is the future (when you’ll be making monthly debt service payments and trying to live off what’s left) that truly matters, not the previous 15 years.

The analysis will obviously be different if you’re thinking about buying a coffee shop vs. a video rental place vs. a manufacturing business, but every industry and business has its unique future opportunities and challenges that you must understand if you’re to make a sound decision.

In doing your industry research, consider what the present owner has to say, but do not use that as your main window into the industry. (Suggestion: Read the third paragraph of my previous column, which had to do with industry research before starting a new business. Many of those things apply in this situation as well and you should do them.)

When you’ve determined that this is a healthy industry that you would like to be in, the next step is to evaluate the business you’re looking at buying. Important: Although you probably won’t have put a “management team” together yet, if you don’t know your way around financial statements and tax returns, find someone independent who does to help you. That person will probably tell you to ask the current owner for the business’ tax return (or Schedule C) and its monthly internal financial statements for the past two or three years.

If the owner declines to provide this information, either break off negotiations or proceed at your own risk. If the owner is willing to provide the information but only after you make a good faith offer to buy, talk to your attorney and put together an offer with several legally defensible exits in case you don’t like what you see when you get the information, can’t construct a business plan that pencils out or can’t obtain financing.

In addition to obtaining tax returns and internal financials, you should now ask the owner or his representative as many questions as you can think of about this specific business – keeping in mind what you’ve al-ready learned about the industry.

Also remember that the owner is trying to get you to pay him money for something he wants to sell; he is not doing you any favors by answering as many reasonable questions as you may ask. If the answers don’t come promptly and cheerfully, or if they aren’t responsive to your inquiries, be careful. And it shouldn’t be any different if there is a third party between you and the owner – don’t let that make you compromise on your need for detailed, relevant information. Take notes, make copies and add to your notebook.

Next time, we’ll talk about what to do with all the stuff you’ve gathered.

Myron Kirkpatrick has been providing free, confidential, locally based business coaching services for Wallowa County Business Facilitation, Inc. since January 2001. He may be reached at (541) 426-5858 or by e-mail at myronk@uci.net. All columns in this series will be archived at www.wallowacountybusiness.org.