For entrepreneurs who don’t want to start at square one with their ventures, buying an existing business can be an attractive option. When you purchase an existing business, you inherit a business model, employees, facilities, customer base – and problems. Finding a small business that suits your talents and experience is key to making a buyout successful.
There are a number of advantages to purchasing an existing business rather than starting one on your own. For starters, as the business is already operating, you won’t have to wait weeks or months to get started. After the sale is complete, you can hit the ground running. You won’t need to do a lot of the prep work involved in starting a new business such as finding a concept, site and filing for permits, as this work has already been done.
If you purchase an existing business, you’ll be able to produce quick cash flow with existing inventory and accounts receivable. By getting quick cash flow, you can immediately begin paying back any loans you may have taken out to get the business off the ground.
By buying an existing business, you already have existing suppliers and customers. Instead of having to search for customers and suppliers, you can build upon existing relationships, making your operations more efficient. If your business has a good reputation, you’ll also inherit that, instead of having to slowly build up public trust.
Finding funding for purchasing an existing business will likely be easier to obtain, as the existing business is a known quantity and perceived by banks to be less of a risk than an untested and untried business concept.
Small business entrepreneurs can also benefit from purchasing a small business because it eliminates a potential competitor they may have had if they had tried to start a business with a similar concept from scratch.
That’s not to say that there aren’t downsides of purchasing an existing small business.
Buying an existing small business will often be more costly than starting one from scratch because the existing owner will want to profit from the sale, or may need additional money to settle the debts of the business before he or she cashes out.
When you buy an existing business, you inherit its reputation, and if that reputation is bad, you could have a difficult time in turning it around, particularly if you retain the same employees and follow the same business model as the former owner.
Other problems you may inherit include legal wrangles, uncollectible bills, problems with suppliers, facilities in need of repair or renovation, obsolete equipment, etc. You may also find it difficult to mesh with existing employees and managers, as your way of doing things is likely to be much different than the former owners’.
Do Your Homework
The potential drawbacks of buying a small business are why it is very important for entrepreneurs to carefully research the existing business they want to buy.
When asking for data on a potential buy, the existing owner will typically want you to sign a letter of intent – a non-binding agreement to buy the business – and a confidentiality agreement which will prohibit you from disclosing sensitive information. When requesting information from a potential buy, you’ll want to see:
Financial records such as balance sheets and records of accounts receivable and bank statements. You’ll probably want about three to five years worth of records to judge the financial health of the business.
Tax returns will help you get a better picture of the profitability of the business and whether any tax liability may be due.
Copies of permits or licenses the business may be required to have.
Customer lists, mailing lists or databases.
List of assets, such as property, equipment, leases, etc.
List of current agreements, contracts, etc. the business may have with suppliers or customers.
Information about key employees, including resumes and personnel records.
By requesting these documents, you can get a better idea of what you’re getting into if you buy an existing business and avoid potential pitfalls.
Also be sure to get full disclosure on whether the person you’re negotiating with is the sole owner of the business, or if other parties have ownership stake in the business. Many a business sale has been hung up in court because a silent or forgotten partner comes along and makes a claim.
Before pulling the trigger and committing to buying a small business, evaluate yourself too. Is this a business that you’re interested in? Can you comfortably afford the financing necessary to fund the purchase? Do you have the time to put into running the business? What is your back up plan in case something goes wrong?
Evaluating your own financial condition and motivations for purchasing a small business is important to making sure that purchasing a business is the right move for you. If you don’t have the experience or interest necessary to run the business, it may not be the right venture for you.
If you decide to buy the business, enlist an accountant of financial adviser to help structure the transfer. Your adviser may be able to help negotiate some favorable items in the sale agreement, such as getting the owner to agree to reimburse you for uncollected receivables. Other concerns you may want to address in the purchase is whether the current owner will be retained in an advisory capacity, non-compete agreements with the current owner, financing of the purchase, whether the purchase will be achieved through a cash payment, asset swap or other means, etc.
By carefully considering the pros and cons of buying an existing business, doing a thorough look at the business, and hiring a professional to orchestrate the sale, you can buy a business that can quickly start making money for its new owner – you.