Thinking about purchasing an existing
business? Here are some things you should know before you take the
plunge.
For some people, buying an existing business is a better option
than starting one from scratch. Why? Because someone else has done
much of the legwork for you, such as establishing a customer base,
hiring employees, and negotiating a lease. Still, you'll need to do
some thorough research to make sure that what you see is what you'll
get.
What Type of Business Should You Buy?
Look for a business that has some connection to types of work
you've done in the past, classes you've taken, or perhaps skills
you've developed through a hobby. It's almost always a mistake to
buy a business you know little about, no matter how good it looks.
For one thing, your lack of knowledge about the industry might cause
you to overpay. And if you do buy the business, you'll have to
struggle up a steep learning curve afterward.
But do try to choose a business that you're excited by. It's
easier to succeed in business when you enjoy the work you're doing.
Finding a Business to Buy
As you begin your hunt for the perfect company, consider starting
close to home. For instance, if you're currently employed by a small
business you like, find out whether the present owner would consider
selling. Or, ask business associates and friends for leads on
similar businesses that may be on the market. Many of the best
business opportunities surface by word of mouth -- and are snapped
up before their owners ever list them for sale.
Other avenues to explore include newspaper ads, trade
associations, real estate brokers, and business suppliers. Finally,
there are business brokers -- people who earn a commission from
business owners who need help finding buyers. It's fine to use a
broker to help locate a business opportunity, but it's foolish to
rely on a broker -- who doesn't make a commission until a sale is
made -- for advice about the quality of a business or the fairness
of its selling price.
Research the Business's History and Finances
Before you seriously consider buying a particular business, find
out as much as you can about it. Thoroughly review copies of the
business's certified financial records, including cash flow
statements, balance sheets, accounts payable and receivable,
employee files, including benefits and any employee contracts, and
major contracts and leases, as well as any past lawsuits and other
relevant information.
This review (lawyers call it "due diligence") will not only help
you understand how the company ticks, but will alert you to
potential problems. For instance, if a major contract like a lease
prohibits you from taking it over without the landlord or other
party's permission, you won’t want to finalize the deal without
getting that permission. Don't be shy about asking for information
about the business, and if the seller refuses to supply any
information, or if you find any misinformation, this may be a sign
that you should look elsewhere.
Closing the Deal
If you've thoroughly investigated a company and wish to go ahead
with a purchase, there are a few more steps you'll have to take.
First, you and the owner will have to agree on a fair purchase
price. A good way to do this is to hire an experienced appraiser.
Next, you and the business owner will agree on which assets you’ll
buy and the terms of payment -- most often, businesses are purchased
on an installment plan with a sizable down payment.
After you have outlined the terms on which you and the seller
agree, you'll need to create a written sales agreement and possibly
have a lawyer review it before you sign on the dotted line.
