Things to remember when you buy an existing business

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Many of us might felt the entrepreneurial pull of running our own business at one time or another. The allure of being your own boss can be really strong, and no wonder. Small business ownership and its operation have proven to be one of the most financially rewarding and intellectually stimulating pursuits that you can follow in your working life. And, you have the opportunity to be a master of your financial destiny.

But, it can also be very frightening for those of you just starting out! We have all heard about the high mortality rates for new business ownership; 50% do not make it through the first three years and 70% will be gone after only five years. There are many reasons for this, including insufficient operating capital, poor management, an unworkable business concept, inability to develop a strong customer base, and just plain old bad luck. It would be great if these potential problems could be eliminated or at least minimized for you as a new business operator Well, they really can!

Buy an existing, profitable business instead of starting one from scratch!

There are several key advantages to this:

Existing successful businesses have a proven track record of profits that will most likely continue long after the business sale. Now you get to apply your new ideas, expertise, and renewed energy to take the business to even higher profitability. You will have established customers for immediate cash flow. No suffering through a long start-up period where you struggle to attract customers to your business. Use these customers as a building block for future business growth.

Typically, you will be able to use a business seller’s financing of a large portion of the purchase price to maximize your buying potential. You will get more bang for your investment!

A vast majority of profitable businesses that are purchased continue to operate successfully for many years to come. There is no question in mind that the success rate for new business owners that buy an existing business is much higher than for those who start a newly formed business. This makes good sense. An existing profitable business has already proven that it is successful. As long as you continue to follow the basic business approach, you too should be able to operate the business successfully.

However, the actual process of purchasing an operating business can be a challenging and complicated undertaking and you will want to be as fully prepared as you can. You need to gather as much information as possible which will help you to; find a suitable operating business for sale, properly value the business, arrange your purchase financing, successfully conduct negotiations, and finally close the deal by transfering the ownership. The good news is that tens of thousands of small business sales occur every year with little or no real problems and the new owners and the sellers both realize their goals. But, you must be fully prepared and knowledgeable for this success to occur! In this article, you will be provided with an overview of each aspect of successfully buying an existing profitable business.

The first step in this process is to find out if you are truly fully motivated to operate a small business

Ask yourself these questions:

  • Do you know what kind of business you want to buy?
  • Are you “technically” qualified and experienced enough to run the business?
  • Do you have the temperament to deal with fickle customers, demanding creditors, and difficult employees?
  • Do you have the attention-to-detail that most businesses demand?
  • Can you deal with the bookkeeping requirements of the business?
  • Are you prepared to devote a great deal of time to the business ?
  • Can you deal with adversity without losing your cool?
  • Can you deal with uncertainty without losing sleep?
  • Are you a good people-person who can successfully deal with both customers and employees?
  • Can you accept the potential significant financial loss that investing in a business exposes you to?

Next, determine the key reason for buying and operating a business:

  • Acquiring an attractive lease or other real estate
  • Buying a job to earn a living
  • Buying prestige (many business owners are respected community leaders)
  • Eliminating competition if you already have a business
  • Buying a hobby or retirement occupation
  • Seeking self-fulfillment and control of your own destiny
  • Seeking an opportunity for a child or other family member

Now ask yourself, what is it that I really like to do, and what is it that I am really good at? If you have determined that you are a truly motivated buyer and you know the reasons that you want to own and operate a business, then you should begin searching only for those businesses that match what you like to do and ones that match your skills, capabilities and knowledge.

There are many sources of businesses for sale and quite a few businesses can be relocated, but to maximize your opportunity of finding the right business for yourself, you should be prepared to relocate to the business’s location if at all possible. Some good sources of information about businesses for sale include:

  • The Internet (but usually not under Business Opportunities, but rather, Businesses for Sale).
  • Newspaper classified advertising under Business Opportunities.
  • Newsletters of various kinds (in-house brokerage publications, regional and national independent publications, etc.).
  • Business Brokers (most reputable ones are listed in the telephone yellow pages and can be checked out through the national professional associations).
  • Word of mouth through friends, family, and colleagues from all walks of life.
  • Magazines and other periodical publications.

Now that you know what your motivations are for buying a business and where to find a good company for sale, you will need to have some idea about how to apply a realistic value to the company that you are considering to buy. This is no easy task! Remember, the seller will want as much as they can get, and you will want to pay as little as possible. The key is to strike a fair deal for both of you. Remember that buying a business is fundamentally a financial investment for most of you and consequently the business is worth only as much as its ability to generate profits. If you are going to work in the business as most people do, then the business should also pay you a fair wage in addition to the profits. The best way to determine a business value is to work backwards from the available profits that a seller can prove.

Next, you will need to start thinking about how you will pay for this business. This also becomes an integral part of the negotiation process to arrive at a selling price for the business. One of the most crucial steps in the purchase of a small business is to establish the financing necessary to accomplish the transaction. This issue is of equal importance to both the buyer and seller. The buyer needs to find the capital necessary to purchase the business from the seller under acceptable repayment terms. The seller needs to ensure that the buyer has established a realistic financing arrangement such that they will receive the agreed upon funds from the buyer. Since many business sales involve some form of seller financing and the seller is likely to be required to take a secondary security position to any other lender, both parties have a strong interest in the types and conditions of the financing.

Once you have completed negotiating the selling price for the business, the next step is to finalize the sale, take possession of the business, and begin operations yourself. Closing the deal is the hardest to accomplish, but usually the shortest part of buying or selling an operating business. After all, the valuations, due-diligence investigations, and negotiations are complete and now it is a matter of getting everything into writing in a form that satisfies everyone so that the transfer of ownership of the business can take place.

At the Closing, the actual legal instruments of transfer are signed and filed, money and/or promissory notes are exchanged, and the buyer becomes the new owner of the business. The Closing date and place are set to everyone’s convenience and all of the pre-closing tasks are assigned to the various parties for completion.

Once the Purchase and Sale Agreement has been signed by both the seller and buyer, there is an excellent chance that the sale will actually take place. The buyer’s and/or the their attorney’s responsibilities will include:

  • Finalizing financial arrangements.
  • Reviewing/signing any necessary leases.
  • Applying for licenses and permits.
  • Complying with the bulk sales law.
  • Preparing any additional legal documentation required.
  • Taking inventory of finished goods and work in process.
  • Final inspection of the business assets.

The seller’s and/or the business’s attorney’s responsibilities will include:

  • Preparing the real estate lease.
  • Preparing the promissory note.
  • Complying with the bulk sales law.
  • Settling all liabilities and liens.
  • Providing for an inspection of the business and an inventory count by buyer.
  • Preparing any additional legal documentation required.
  • Complying with any other provisions in the Purchase and Sale Agreement.

The business broker’s responsibilities include:

  • Ensuring buyer/seller responsibilities are carried out.
  • Arranging for third-party leases.
  • Acting as a go-between.
  • Handling buyer/seller anxiety.
  • Participating in the closing.

It may seem obvious, but I’ll state it anyway because there may be more to it than you think. The first thing the buyer does after the closing is to take possession of the business! This may include the following considerations:

  • Change the locks on the business property.
  • Formally notify the employees.
  • Notify the suppliers.
  • Notify the customers (if appropriate to the type of business).
  • File all new legal paperwork with the proper authorities (titles, licenses, liens, etc.).

Well, that’s a snapshot of what it takes to buy an existing business. As involved as it may seem, it is far less trouble than starting a new business, and certainly less risky. If you have an entrepreneurial mind-set and would like to consider getting into business for yourself, even if it is only a home-based business to start, I strongly urge you to consider buying an existing profitable business. There are tens of thousands of them out there right now just looking for the right new owner.

 

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