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 from zero. But starting from zero 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 move on.
In most cases, buying an existing business is less risky than starting from scratch. When you’re buying a business, you’re taking over an operation that already generates cash and profit. You have an established customer base, reputation, and employees who are familiar with all the business’ aspects. And you do not have to reinvent the wheel – setting up new procedures, systems, and policies – because a successful formula for doing business has already been implemented.
As a disadvantage, buying a business is often more expensive than starting from scratch. However, it is easier to get financing to buy an existing business than to start a new one. It is suggested that a buyer should be ready to pay from 30% to 50% of the business’ price in cash and fund the remaining amount. 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, nothing is safe, and buying an existing business is no exception. If you are not careful, you can wake up with an outdated inventory, uncooperative employees, or outdated delivery methods. To be sure you are making the best choice when buying an existing business, follow these steps:
- The right choice – Buying the perfect business begins with choosing the kind of business that’s right for you. The best start 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 best fit 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. Then, choose the geographic area where you want to have a business. Evaluate the workforce and business costs in that area, including salaries and taxes, to make sure they are acceptable to you. Once you’ve 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 the Chamber of Commerce and Industry website. You can also post an ad in the “I Want To Buy” section, describing what you are looking for. Keep in mind, just because a business is not listed 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 them if you make an offer. Put your connections and business contacts in use, and you might find out about other good business.
- A more careful analysis – Whether you use a broker or not, you will definitely want to form an “acquisition team” – your banker, accountant, and lawyer – to help you. 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 industry and 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 relationships with the business. Contact your industry associations, licensing agencies, and credit reporting agencies to make sure there are no complaints against this business. Check existing company information on www and Social Media.
If the business still looks promising after the preliminary analysis, your purchasing team should start looking at the revenue earned by the business and the asking price. Whatever method you use to determine the correct market price of the business, 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-intangible 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 business’ owner and/or accountant to show you balances, income statements, cash flow statements, and tax returns for the past three years. These are all key business health indicators. These documents will help you make a financial analysis that will highlight potential problems and also provide a closer look at a broad range of less tangible information.
This is a major investment decision. With so much in the game, it is essential to properly prepare, educate yourself for this journey, and take the necessary steps to make sure you make all the right choices along the way.
Another major challenge is that the vast majority of buyers do this for the first time. Faced with the need to make crucial decisions one after the other, they become overwhelmed and frustrated, and soon give up at the project.
As Thomas Edison once said: “There is always a way to do something better … find it!”
The Six Steps To Success:
1. Assign a deadline for buying a business (not just “look for” one).
2. Assign time each day to work on this project.
3. Organize your finances.
4. Try to determine the kind of business that will thrive with your qualities and qualifications and will not suffer because of your weaknesses.
5. Ask for professional advice from a business broker. With the multitude of crucial decisions that you have to take in this new and very complex field, they can help with their knowledge, with a methodology to solve all the situations and possible problems that will occur along the way.
6. 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!