1. The Perspective of Buying a Business
Usually, when someone is thinking about starting a business, they are thinking to start from scratch – developing their own ideas and building the company step by step. But this strategy has some distinct disadvantages, including the difficulty of building a customer base, marketing the new business, hiring staff, and setting the cash flow…all without a history or reputation to rely on.
Buying an Existing Business
In most cases, buying an existing business is less risky than starting from scratch. When buying a business, you are taking over an operational aggregate that already generates cash and profit. You have an established customer base, reputation, and employees who are familiar with all business-related aspects. And you do not have to reinvent the wheel – setting up new procedures, systems, and policies – because a successful operational formula has already been tested and implemented.
As a disadvantage, buying a business is often more expensive than starting one from scratch. However, it is easier to get financing for the acquisition of an existing business than to start a new one. It is suggested that a buyer should be ready to pay in cash 30% to 50% of the business’ price and fund the remaining amount using alternative means.
Bankers and investors generally feel more comfortable getting involved in a business that already has a proven track record. In addition, buying a business can give you valuable legal rights, such as patents or copyrights that can be very profitable.
Of course, complete safety is a utopian desiderate, and buying an existing business is no exception. If not careful, you can find yourself the owner of an outdated inventory, surrounded by uncooperative employees, or caught up in outdated delivery methods. To be sure you are making the best choice when buying an existing business, follow the next steps.
The right choice
Buying the perfect business begins with choosing the kind of business that is right for you. The best starting point is to look for an industry that you are familiar with and that you understand. Think about the types of business you are interested in and that are best fitted for your skills and experience.
Also, consider the size of the business you are looking for, namely, the number of employees, the number of locations and sales number.
Then, choose the geographic area where you want to be active. Evaluate the local workforce and business costs, including salaries and taxes, to make sure they are acceptable to you.
Once you have chosen a region and industry that interest you, investigate every business in the area that meets your requirements. Start by reading the „Business for Sale” section of our website.
Keep in mind that just because a business is not listed online, it does not mean it is not for sale. Talk to business owners in the industry; many of them may not have their businesses for sale, but would consider selling if you make an appropriate offer. Put your connections and business contacts in use, and you might find out about other good opportunities.
A thorough analysis
Whether you use a broker’s services or not, you will definitely want to form an “acquisition squad” – your banker, accountant and lawyer – to help you through the technicalities of this process.
These counselors are essential to what is called “due diligence”; that is, reviewing and verifying all relevant information about the business you want to purchase. When due diligence is ready, you will know exactly what you buy and from whom.
The preliminary analysis begins with a few basic questions: Why is this business for sale? What is the general perception of the industry and the business, and what are the prospects for the future? Does the business own – or may own – enough market share to remain profitable? Are the necessary raw materials abundant? How has the company’s product or service lines changed over time?
You also need to evaluate the reputation and strength of the business’ relationships. Talk to existing customers, suppliers, and sellers about their connection with the business. Contact the industry associations, licensing agencies, and credit reporting bureau to make sure there are no complaints against the company. Check the existing company information on the WWW and Social Media.
After completing the preliminary analysis, if the business still looks promising, your acquisition squad should start analyzing the revenues earned by the business and the asking price.
Whatever method you use to determine the correct market price of the company, the business valuation must consider issues such as the financial health of the business, the history of profits, and the growth potential, as well as non-tangible assets (e.g. mark and position on the market).
To get an idea of the company’s expected profits and future financial needs, ask the current business owner and/or the accountant to show you balances, income statements, cash flow statements, and tax returns for the past three years. These all are key business health indicators.
These documents will help you employ a financial analysis that will highlight potential problems and also provide a closer look at a broad range of less tangible information.
Buying a business is a major investment decision. With so much at stake, it is essential to properly prepare, educate yourself for this journey, and take all necessary steps to ensure you make all the right choices along the way.
Another major challenge is that the vast majority of buyers embark on this journey for the first time. Faced with the need to make crucial decisions at a very fast pace, they become overwhelmed and frustrated, and soon give up the project.
As Thomas Edison once said: “There is always a way to do something better… Find it!”, we present you The Six Steps To Success:
- Set a deadline for buying a business.
- Assign time each day to work on this project.
- Organize your finances.
- Try to determine the kind of business that will thrive on your qualities and qualifications and will not suffer because of your weaknesses.
- Ask for professional advice from a business broker. Given the plethora of crucial decisions that you have to make along the way, a broker can help with know-how and with an already tested methodology to solve all possible problems that could occur along the way.
- If you do not have business experience, then educate yourself about the process. When it comes to investing in your future, you can never know too much!