Are you looking for a business to buy? A lot of planning will be required, before you open the doors (or go live with the website) of your brand-new business. This article provides some general pointers and caveats to consider, to help make your business purchase a success.
The Right Business
What is the right business for you? Your answer will depend on a host of factors, some of which will center on your particular needs and lifestyle. Conduct a thorough (and honest) self-evaluation and determine whether you: a) are physically, financially, and emotionally suited to the business (there is big difference in the day-to-day operation of an antique shop versus a fast food restaurant); and b) do you possess the necessary skills, experience, and commitment to make the business a success (do you know anything about running a nail salon?).
There are many ways to find a business for sale, including online, local trade papers and the assistance of a business broker. When conducting your search, remember that not every business for sale is a good investment. For example, a shop that looks great from the curb or has a flashy website may not be well-run or have the proper staffing to turn a profit. Before buy, you need to have a good sense of exactly what you are buying. How do you do this? Conduct due diligence and evaluate the risk. You should also have the business independently valued.
Due Diligence and Risk Assessment
Due diligence is the process of thoroughly reviewing the business to determine the likelihood of its future success. With an existing business, you will need to inspect the building or office space, the inventory and equipment, the company brand and products, as well as gain insight into the current customer base, vendors, competition and market. Without saying, you will need to carefully look at the books. Prior to seriously considering a business, take a deep dive into its financial history. This should include examining tax returns, balance sheets, cash flow statements, sales records and accounts receivable, accounts payable, debt disclosures and advertising costs. In addition, review any lease and franchise agreements, if applicable.
In addition to your own due diligence and risk assessment, an independent valuation by a “business valuation expert” will confirm whether the asking price is reasonable. There are several different valuation methods. Contact your accountant about obtaining these valuation services and make certain you understand the results. You should also ask her about the taxes involved with owning this business.
Making an Offer
Once you decide to purchase the business, you will make an offer. This is a legal matter. All the nitty-gritty details of the sale need to be confirmed in writing. This is a “measure twice and cut once” exercise that must be done right the first time. Mulligans are very expensive! For example, make sure the agreement contains any necessary conditions in the offer, so you may withdraw (without penalty), if the seller does not meet all of the agreed-upon conditions. Are you buying the business entity or the assets?
Even though there are numerous caveats to consider before buying a business, it is generally accepted that buying an existing business is a much safer and faster means to profitability than building a business from the ground up. An existing business will typically come with an established customer base, veteran employees, entrenched policies and processes and even easier options for financing. All that noted, look before you leap!
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