I
want to start a business but don’t want to work
from scratch. How do I go about buying an existing business?
When
most people think of starting a business, they think of
beginning from scratch--developing your own ideas and
building the company from the ground up. But starting
from scratch presents some distinct disadvantages, including
the difficulty of building a customer base, marketing
the new business, hiring employees and establishing cash
flow...all without a track record or reputation to go
on.
Buying an Existing Business
In most cases, buying an existing business is less risky
than starting from scratch. When you buy a business, you
take over an operation that's already generating cash
flow and profits. You have an established customer base,
reputation and employees who are familiar with all aspects
of the business. And you don't have to reinvent the wheel--setting
up new procedures, systems and policies--since a successful
formula for running the business has already been put
in place.
On the downside, buying a business is often more costly
than starting from scratch. However, it's easier to get
financing to buy an existing business than to start a
new one. Bankers and investors generally feel more comfortable
dealing with a business that already has a proven track
record. In addition, buying a business may give you valuable
legal rights, such as patents or copyrights, which can
prove very profitable. Of course, there's no such thing
as a sure thing--and buying an existing business is no
exception. If you're not careful, you could get stuck
with obsolete inventory, uncooperative employees or outdated
distribution methods. To make sure you get the best deal
when buying an existing business, be sure to follow these
steps.
The Right Choice
Buying the perfect business starts with choosing the right
type of business for you. The best place to start is by
looking at an industry with which you're both familiar
and which you understand. Think long and hard about the
types of businesses you're interested in and which best
match your skills and experience. Also consider the size
of business you are looking for, in terms of employees,
number of locations and sales. Next, pinpoint the geographical
area where you want to own a business. Assess labor pool
and costs of doing business in that area, including wages
and taxes, to make sure they're acceptable to you. Once
you've chosen a region and an industry to focus on, investigate
every business in the area that meets your requirements.
Start by looking in the local newspaper's classified section
under "Business Opportunities" or "Businesses
for Sale". You can also run your own "Want to
Buy" ad describing what you are looking for. Remember,
just because a business isn't listed doesn't mean it isn't
for sale. Talk to business owners in the industry; many
of them might not have their businesses up for sale but
would consider selling if you made them an offer. Put
your networking abilities and business contacts to use,
and you're likely to hear of other businesses that might
be good prospects.
Contacting a business broker is another way to find businesses
for sale. Most brokers are hired by sellers to find buyers
and help negotiate deals. If you hire a broker, he or
she will charge you a commission--typically 5 to 10 percent
of the purchase price. The assistance brokers can offer,
especially for first-time buyers, is often worth the cost.
However, if you are really trying to save money, consider
hiring a broker only when you are near the final negotiating
phase. Brokers can offer assistance in several ways.
- Prescreening businesses for you. Good
brokers turn down many of the businesses they are asked
to sell, whether because the seller won't provide full
financial disclosures or because the business is overpriced.
Going through a broker helps you avoid these bad risks.
- Helping you pinpoint your interest.
A good broker starts by finding out about your skills
and interests, then helps you select the right business
for you. With the help of a broker, you may discover that
an industry you had never considered is the ideal one
for you.
- Negotiating. The negotiating process
is really when brokers earn their keep. They help both
parties stay focused on the ultimate goal and smooth over
any problems that may arise.
- Assisting with paperwork. Brokers know
the latest laws and regulations affecting everything from
licenses and permits to financing and escrow. They also
know the most efficient ways to cut through red tape,
which can slash months off the purchase process. Working
with a broker reduces the risk that you'll neglect some
crucial form, fee or step in the process.
A Closer Look
Whether you use a broker or go it alone, you will definitely
want to put together an "acquisition team"--your
banker, accountant and attorney--to help you. These advisors
are essential to what is called "due diligence",
which means reviewing and verifying all the relevant information
about the business you are considering. When due diligence
is done, you will know just what you are buying and from
whom. The preliminary analysis starts with some basic
questions. Why is this business for sale? What is the
general perception of the industry and the particular
business, and what is the outlook for the future? Does--or
can--the business control enough market share to stay
profitable? Are raw materials needed in abundant supply?
How have the company's product or service lines changed
over time?
You also need to assess the company's reputation and the
strength of its business relationships. Talk to existing
customers, suppliers and vendors about their relationships
with the business. Contact the Better Business Bureau,
industry associations and licensing and credit-reporting
agencies to make sure there are no complaints against
the business.
If the business still looks promising after your preliminary
analysis, your acquisition team should start examining
the business's potential returns and its asking price.
Whatever method you use to determine the fair market price
of the business, your assessment of the business's value
should take into account such issues as the business's
financial health, its earnings history and its growth
potential, as well as its intangible assets (for example,
brand name and market position).
To get an idea of the company's anticipated returns and
future financial needs, ask the business owner and/or
accountants to show you projected financial statements.
Balance sheets, income statements, cash flow statements,
footnotes and tax returns for the past three years are
all key indicators of a business's health. These documents
will help you conduct a financial analysis that will spotlight
any underlying problems and also provide a closer look
at a wide range of less tangible information.
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