Tips on Buying an Existing Business

Buying an existing business may be the preferable alternative to starting a business from scratch. Taking all the elements into account, there are both notable pros and cons of buying an existing business.

Advantages

* Immediate Operation

Someone else has established the company – once you take over, all you need to do is maintain the status quo.

* Quick Cashflow

You can generate income from the day that you take over, thanks to existing inventory and receivables.

* Existing Customers

Customers and suppliers will already have been sourced, and what’s more good relationships will have been established with both.

* Easier Financing

It will be easier to obtain finance because the established business will already have a strong track record.

* Less Competition

It will certainly be easier to deal with the competition through an established business than a lesser known-one.

Disadvantages

* Cost

Sometimes, establishing a business off your own bat can be far cheaper to do than if you were to buy an existing one.

* Problems

There may be problems to deal with in the business, which may be why it’s on the market. You need to establish what these are at the outset, in order to make sure that you are not buying into a potential disaster.

* Personality Clashes

You may find that you come into conflict with existing managers and/or employees.

* Obsolete Goods

You may also find that both inventories and equipment may not exist any more.

* Uncollectable Receivables

Receivables listed on the balance sheet may prove to be uncollectible.

Getting Started

Much like making any major purchase, there are important steps to take when it comes to buying an existing business.

You need to do extensive research into the type of business you want, the ones available that are right for you. When you have made your final choices, extensively research the background of the business, look at its successes and problems, and then evaluate whether or not you want to proceed. It is worth erring on the side of caution, just in case you land on the wrong side of any unscrupulous vendors. Hire a lawyer and accountant who can guide you through the process while offering advice into the bargain.

There are many places to look for the businesses that you want. Trade publications are a good first port of call, depending on the industry that you want to work in. Also check out business magazines and newspapers. The internet will also have lots of advertisements and classifieds for businesses for sale. If you want to, you can also use a business broker, who can screen businesses for sale and assess if there are any pitfalls. Although, that said, the fees for this will only add to the end total.

And even if you like a business that isn’t classified as being on the market, it still wouldn’t hurt to contact the owner and make an offer. The worst that can happen is that the owner will say no.

What Happens Once You Have Found a Business

As mentioned, do extensive research on the business that you want, as well as the industry and the market in which it is in. Lawyers and accountants should be able to offer help and advice in this regard. By doing so, you will increase your chances of making the right decision instead of investing in a business that could go off the rails.

In most cases, the vendor won’t release any information until you have signed a letter of intent that makes a non-binding offer and also a confidentiality agreement.

It should be noted that the business is being sold for a reason. What you have to do is find out what that reason is. It may be past bad management. An out-of-date product. Or a bad local economy. What you have to do is assess how big these problems are when it comes to make your decision in buying the business.

You should investigate the following:

* Organizational Documents

These document the organisation of the business and include partnership agreements, articles of incorporation, and business certificates. These should be examined to determine how the business is structured and capitalised.

* Contracts and Leases

These include property and machinery leases, sales and purchase contracts. They should determine the exact obligations the business is subject to.

* Financial Statements

You should look at the financial statements for the past three years to assess the financial shape of the business.

* Tax Returns

Again, go through the tax returns for the past three years to assess the profitability of the business and to determine whether any tax liability is outstanding.