Buying an Existing Business

In purchasing an established business, you can eliminate some of the issues associated with starting a brand new business, such as building a customer base or brand and developing products. However, you may also acquire its debts and, possibly, a bad reputation. While the opportunity may be less risky in some respects, you must perform due diligence to ensure that you are fully aware of the terms of the purchase. This process can be complex, and you should consult an expert before beginning. Keep in mind that you will eventually want to employ the services of your banker, accountant, and lawyer before closing the sale.  

There are favorable aspects to buying an existing business, such as drastic reduction in startup costs and the ability to increase cash flow quickly. In addition, it’s generally easier to get financing for an existing business than to start a new one. Bankers and investors often feel more comfortable dealing with a business that already has a proven track record. You may even acquire potentially valuable and profitable copyrights and/or intellectual property.

On the other hand, purchasing costs may be much higher than that of starting a new business because of the initial money that has been invested in the business concept, customer base, brand, etc. Also, be aware of hidden problems associated with the business like uncollectible accounts receivable. If you don’t do your due diligence, you could find yourself dealing with unforeseen and costly issues like obsolete products or insurmountable debt.

Common Mistakes

As you may have guessed from our emphasis on the importance of researching and due diligence, one of the most common mistakes is the failure to verify all data. Many potential purchasers will accept information given to them as accurate without personal or professional verification. This can lead to a burdensome future with your new purchase. Below are a few other mistakes purchasers often make.

• Not Allowing for Adequate Cash on Hand: Having as much cash available as possible is just as important when buying a business as it is when starting one. Don’t be tempted to use all of your cash in one place – even for a down payment on a purchase. You will need cash for operating your business before you can start to rely on income. Prepare your financial statements carefully and refer to the cash flow statement as a guide for how to use your cash.
• Unrealistic Payment Schedules: Those who purchase established businesses tend to overestimate short term revenue projections, which can lead to overcommitting on payments. Remember that this is a new venture for you and you will likely experience growing pains and unexpected costs within the first year. Give yourself some room to financially prepare for unforeseen events.
• Buying Uncollectible Receivables: Do not think that because you are buying a business, you have to purchase everything that comes along with it. Always remember you have room to negotiate. This is a common mistake with a company’s accounts receivables. On one hand, you want receivables because it is a source of income, however, if they are 90 days or older it is likely that you will not be able to collect on them. Therefore it is not wise to purchase them. Arrangements such as having the seller warrant the receivables will ensure that if the accounts are indeed uncollectible, you will not have to pay for them.
• Failing to Make a Smooth Organizational Transition into Ownership: Purchasing an existing business is not only new to you; it is also new to the employees who work there. It is a big change that can be met with heavy resistance if it is not handled with care. Build relationships with the seller, employees, and suppliers of the company before the sale is final, and have conversations about the operations so you have an idea of the culture before you take over. Share your ideas with them about your vision for the business, listen to their feedback, and learn from them.