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.[ + Expand All ]
As with any purchase or business endeavor, you want to be selective about the type of business you purchase. You can ask yourself the following questions: Am I familiar with the industry? Does my skillset and disposition match the type of business? Will I enjoy being the owner of this business? What size business will I be comfortable operating? Is the business in a good commercial location? These are just a few suggestions to get you started asking the right questions. You can visit the U.S Small Business Administration’s website for more tips on this topic.
Other than the traditional ways of finding a business to purchase (want ads, for sale signs, Internet listings, etc.), you can reach out to a business broker. Business brokers are generally paid a 5% - 10% commission of the sale price, and can potentially make the purchase process easier for you. They are knowledgeable in negotiating the terms of sale, prescreening businesses, helping you pinpoint your interests and matching them to appropriate businesses, and more.
Research consists of gathering all of the information specific to the business under consideration for purchase, learning about the industry, market, and all aspects of the business’ operations. Due diligence is the analysis of all of this information to ensure that the purchase agreement is fair to both parties, that the business is viable, and that no information is left uncovered.
A good place to start is by gathering all of the information about each item on the balance sheet and income statement, which can be provided to you by the seller. For the sake of brevity, we will discuss a few key pieces of information to gather and how it will help you in the process of due diligence. An exhaustive list can be found on the SBA website, and online by conducting a simple search.
Once you have all of the information you need, you can start analyzing the company based on the research you have done. The due diligence process is vital to your success and you should consult experts to assist you. Have a third party assess the value of inventory, assets, and the accuracy of financial statements for objective results. This will help you in the negotiating process. The seller will most likely have a different idea of the value of his business than you will, and any discrepancies found in the due diligence process can be discussed in negotiations.
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.