The joy of owning a business is the dream of many would-be entrepreneurs. If you are one of them, you have two main choices: start a company from scratch or find an already existing business. Your dream can become a reality more quickly if you decide on the latter.
Here’s a look at important points to consider if you are thinking about buying a company.
Pros and Cons
The biggest benefit of buying an existing business is that the company is already in operation. Many of the kinks and early startup decisions, such as the site's location, have already been worked out or decided.
Money is one of the biggest concerns of a budding entrepreneur. Buying a business has both pluses and minuses in this regard. On the plus side, you do not typically have to worry about startup costs. Another plus is that immediate cash flow is often available from receivables and inventory.
A company that is already in business has existing customers, and hopefully, goodwill on tap, too. If you need a loan to upgrade equipment or purchase new supplies, financing is usually a smooth process based on the business's’ track record and profit and loss statements.
Of course, there are downsides. The biggest is the upfront cost: namely, the purchase price of the company.
In addition, hidden costs and problems may be buried where they are hard to see prior to taking ownership. There can be debts and taxes owed by the business or uncollectible receivables. There could be problems getting inventory, technological advances that make the product line obsolete, or overwhelming competition.
Though you will now be a proud new business owner, you still need to build a good working relationship with the managers and employees currently running the company.
Finding a Business to Buy
Deciding to buy is step one. Then, you need to start researching existing businesses to find one that is a good fit for your budget and your interests.
Good places to look include:
- Trade associations, magazines, and websites
- Local chambers of commerce
- Online businesses-for-sale websites
- Your immediate area
The process of identifying and evaluating a business can seem daunting. Hiring a business broker is a good way to ease your way through the confusing jungle of buying a company. They can help you figure out exactly what type of business, location, size, and price you seek. Then they can use their industry contacts, skills, and experience to pre-screen firms for you.
Negotiating is an intricate dance, but brokers are well versed in the process. They also know how to handle the paperwork required by local regulations, licenses, permits, bank financing, and escrow.
Things to Consider When Buying a Business
You need to protect yourself when buying a business. Having a team in place to advise you, including an insurance agent, accountant, attorney, and banker, is highly beneficial.
Together, you can conduct due diligence and a thorough analysis of each company you are consider purchasing. Among the questions you need answers to are:
- Why is it for sale?
- What is the outlook for success, in the immediate future, the next year or two and then five and ten years down the line?
- Is the industry a growing one? Is this particular business growing?
- Does it have the customer base now and in the future to show a profit?
- Is inventory a problem? Are raw materials scarce?
- Is the product line viable? Does it need to change? What is the overall cost of that?
- What is its reputation with customers, suppliers, within the industry, with the Better Business Bureau and credit bureaus?
If the business looks viable and the future looks profitable, the next step is for you and your team to dig deep into the operating details of the firm and analyze the overall financial health of the company. This involves an in-depth review of the history of earnings and losses, analysis of potential growth, and the worth of its brand name, goodwill, and position in the market.
Next, you'll need to investigate financial statements in order to project future returns. If this is not in your wheelhouse, you'll need an expert who understands balance sheets, cash flow statements, accounting footnotes, tax returns, and income statements. You should go back at least three years if the information is available.
Buying the Company
Once you decide a business has potential and is within your financial means, it is time to negotiate a price. Most owners prefer to let members of their team, including the broker, do this. They are professionals who keep a focused, impartial view of the process. The result of their more impersonal bargaining style is often a better price for you.
It is critical to have professionals around you that you trust. There are many types of legal and finance documents, from security agreements to bills of sale and IRS forms, that may need expert review. The process is complicated and can be stressful. Rely on a team of experts so that you get the best deal possible.
Lastly, your final step is transitioning into the ownership position: getting to know the employees, the product line, new premises, customers, and suppliers. Taking on an existing business is not always smooth or uncomplicated, but with some expert help, hard work, and patience, it can be a profitable and exciting endeavor.