Buying a business? Ask the right questions.

By Dick Milon, SCORE Counselor

Originally Published: May 22, 2016 5:50 a.m.

Question: An opportunity has come up to buy an existing business. I have a real affinity for this type of enterprise, but am leery of possible pitfalls. Can SCORE provide some advice on what I should look for before completing the deal?

Answer: Buying an existing business offers many positives, including the opportunity to move along the path to entrepreneurship more quickly. With all of the startup tasks already taken care of, a staff in place, an established customer base, existing vendor relationships, and processes and procedures laid out, this gives you a head start. But doing your research before making the final decision is imperative.

According to William Comiskey, a SCORE Mentor, “Investing in a business is the same as investing your savings in a mutual fund or stock portfolio to secure both your future and possibly your retirement. You study and review the past performance and the current condition and seek help and advice from professionals on the prospects for the future.”

According to Entreprenur.com, the critical questions for which you need answers are:

• What is the Owner’s Discretionary Income, or ODI: This is what the seller is taking out of the business after paying his suppliers, employees, rent, overhead expenses and taxes. If you can’t live on the current ODI, or if ODI has been declining for several years, watch out! If the ODI seems healthy, get the seller to put it in writing, and hold back on naming your purchase price until you can confirm the seller’s ODI numbers are accurate.

Beware the seller who tells you his actual ODI is greater than what he reports -- if he’s taking extra cash out of the till, understating income on tax returns, or treating personal expenses as business write-offs, what are the odds he is being scrupulously honest with you?

• Where is the location of the nearest big competitor: If you’re buying a retail or service business, chances are there’s at least one franchise or “big box” competitor that may wipe you off the map if they ever come to town. Where’s the nearest outlet or franchisee?

• What are the sales taxes: When you buy the assets of a business, you avoid responsibility for the seller’s debts, obligations and liabilities (other than his lease and other debts you expressly agree to assume and continue paying). Except for sales taxes.

Don’t pay a penny until you know the seller has filed all state and local sales tax returns. Ask your attorney if you can get a “clearance certificate” from the state tax authority stating they won’t come after you for any sales taxes your seller owed.

• What is the businesses reputation: Don’t rely on just “hard data.” Go to the library and skim the local newspapers going back at least five years. Is the business active in the community? Is it written up frequently? Is there negative publicity? Check Social media and also go to the local police station and ask if there are frequent complaints by or against the current owner.

Spend some time talking — hang out at the local library, senior center, coffee shops and public parks and talk to the “old timers” who congregate there. Yes, it’s tedious and time-consuming, but it may save you from making a deal you will live to regret. And as Comiskey suggests, you don’t have to embark on the process alone. Consider tapping the expertise of professionals like your SCORE mentor who can help you assess the opportunities and risks.

Find the advice you need online today at SCORE.org. For a SCORE mentor, go to northernarizona.score.org. Follow us on Facebook at Northern Arizona SCORE for the latest small business news. Call 928-778-7438 or emailscoreoffice@scorenaz.org.

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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.