What to think about when taking over an existing business?
About this video
Sal Khan gives advice for anyone thinking of buying an existing business, like a convenience store or health care practice. The key question is why the owner is selling: it may be a legitimate retirement, or the numbers may be pumped up. He recommends observing the business for a long time, gathering your own data, and considering how much depends on the current owner's effort.
You'll be able to
- explain why asking 'why are they selling?' matters.
- describe ways a seller might make a business look better than it is.
- explain why the current owner's effort affects the business's value.
Key words
- auditing
- An independent check of a business's financial records to confirm they are accurate.
- accounting practices
- The methods a business uses to record and report its money.
- risk free
- Having no chance of losing money, which is rarely true in business.
Transcript
- Every now and then I get a friend or a family member saying that they're interested in buying some type of a business. So this wouldn't be about starting a business, but there might be an existing business. Maybe it's a convenience store or maybe it's some type of health care practice or whatever it might be, and they say, hey, I'm going to buy this from the existing owner and I think it's going to be a great business.
And they'll often say it generates this much money and I only have to put this much in and it feels risk free. And what I tend to tell them, and I don't wanna be one of these naysayer people, I say, possibly. But what you always have to think about is why are they selling it?
And sometimes there's a good reason why they're selling it. Maybe they're retiring and they don't have someone to pass the business onto and they see in you kind of the person that they would love to see running that business going forward. That could be a very legitimate thing.
But oftentimes, there might be situations where they might be pumping up some of the numbers, they might be showing you business in the busy season or on the busy day. And so I wouldn't take, especially if it's a small business that doesn't have auditing, that doesn't have really strict accounting practices.
I would observe the business for a very long period of time and I would take your own data as to whether the numbers you're hearing about are real. And I also wouldn't discount how much effort and work the existing owner is putting into it and what happens to the business if they're no longer there.
If all of that works out and if it really does make sense, then, yeah, you might be onto something.
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