What should I know before I buy a business?

(FSB Online) -- Dear FSB: I am looking for advice on arranging financing for a startup or the purchase of an existing business worth several million dollars. I could come up with a small cash investment.

- Rob Schmidt, Davenport, Iowa

Dear Rob: The most important question to ask yourself is: Do you truly want to run this business? And are you capable of it? Many aspiring entrepreneurs find that they give up the illusion of security for the illusion of freedom when they go into business for themselves. When you are a business owner, you are on duty 24/7 and you are on the line for all of the actions and debt of the company.

It is very difficult to get a bank loan for a startup. Whether you are seeking money for a new business or an acquisition, lenders look at the four Cs: credit, collateral, commitment and capacity. What is your credit score? Do you have any hard assets to pledge, such as real estate? How much money will you contribute? What else will you bring to the party? How viable is your business? And will you be able to pay back the loan? If your four Cs aren't in great shape, then look to the four Fs: friends, family, fools and your own personal funding.

If you ultimately do want to buy an existing operation, make sure you investigate it thoroughly before you close the deal. Some questions to ask: What will it take to run this company? What are the real reasons for the sale? Will key managers be willing to stay after I buy it? Are there upcoming changes in the law that will affect the future of the business or its industry? Is there new competition on the horizon? Is the firm part of a mature marketplace with little room for growth? How much debt does the company have? And are its gross margins strong? Asking tough questions now is far better than having the answers surprise you later.