When someone thinks about starting a business, they think of starting by themselves and forming their own ideas and creating a company from scratch. But starting a business from nothing, leads issues including the problem of gathering a client base, marketing the new business, hiring the right staff and establishing a solid cash flow, all without a good image or connections in the business world.
Today, we’re going to talk all about purchasing a business.
Purchasing Existing Businesses:
Most of the times, purchasing the existing businesses is less problematic than starting from scratch. When you purchase a business, you take over an organization that’s already making cash flow and revenue. You will get a strong customer base, good image and a staff that is familiar with all aspects of the business. And you don’t have to reinvent the entire structure yourself, such as: setting up new systems, policies and procedures because a good system for running the business is already working.
On the negative side, purchasing a business is mostly more costly than building one from scratch. However, it’s easier to get the money required to buy an existing business than to build a new one. The bankers and the investors will feel easier in dealing with a business that already has a solid track record in the market. Also, purchasing a business will most likely give you valuable legal rights, such as the patents or copyrights, which can prove very beneficial. Of course, there’s no such thing as a sure thing and purchasing an existing business is not an exception at all. If you’re not careful, you could get stuck with obsolete inventory, uncooperative staff or ineffective distribution systems.
Making The Right Choice:
Purchasing the best business will start with choosing the right type of business for you. The best place to start is by looking at an industry that you are familiar with and which you understand well. Think long and wisely about the types of businesses you’re interested in and which match your skills and experience perfectly. Also consider the size of business that you are looking for, in terms of staff, number of locations and sales record. Then you need to consider the geographical aspect of where you want to own a business. Assess the labor pool and costs of doing business in that specific area, including salaries, wages and taxes, to ensure they’re good enough for you. When you’ve selected a region and an industry to focus on, check out every business in the area that meets your needs, wants and requirements. You should talk to the owners of the businesses in the industry. Many of them will mostly not have their businesses up for sale but they might consider selling if you made them a good offer. Put your networking abilities and business contacts to use, and you will most likely get to hear of other businesses that might be solid options for you.
Getting in touch with a business broker is also a good way to find businesses for sale. Most brokers are hired by the sellers of businesses to find buyers who are suitable and they also help negotiate the deals. Hiring a broker will cost you a commission though. And it is typically about 10 percent of the purchase price. The help that the brokers can offer, specifically for new buyers, is mostly worth the cost. However, if you are really trying to save money, consider getting a broker only when you are about to enter the final negotiating phase.
Important Things To Consider:
Whether you use a broker or not, you will definitely want to put make an “acquisition team” which will include your banker, accountant and attorney to assist you in the process. These advisors are important for something called “due diligence”, which refers to reviewing and verifying all the relevant information about the business you are considering for purchasing. When due diligence is done, you will know exactly what business you are buying and from whom. The basic analysis starts with some basic questions. Why is this business up for sale? What is the general perception of this specific industry and the particular business? What is the view for the future? Can the business hold enough market-share to stay profitable for a long time? And many more questions like these!
You will also be required to analyze the company’s image, reputation and the strength of its business relationships. Talk to the existing vendors, customers and suppliers about their relationships with the business. If the business looks promising after your basic analysis, your acquisition team should focus on examining the business’s returns and its purchase price. Whatever method you choose to determine the market price of the business, your assessment of the business’s price should consider things such as the financial strength, earnings record and growth potential of the business. And yes, the intangible assets should be considered as well!
To get an idea of the anticipated returns and future financial requirements of the business, ask the business owners and accountants to show you the projected financial statements. The cash flow statements, income statements, balance sheets and tax returns for about the last three years are all key indicators of a business’s overall health and strength. These documents will help you do a financial analysis that will highlight all the underlying problems and will also provide a deeper look at a wide range of less tangible information of the business that you are going to purchase.
Purchasing a business is not really a difficult task if you take the right steps and approach. Here’s the best place you can check for buying a business.