DO YOUR HOMEWORK BEFORE BUYING AN EXISTING SMALL BUSINESS
Do you dream of owning your own business?
There’s more than one way to make
this dream come true. Some entrepreneurs
launch a business from scratch, while others
buy an existing business. There are certainly
advantages to buying an established business,
but is it the right move for you? Let’s
PROS AND CONS OF BUYING AN
If the idea of starting a new business isn’t
your cup of tea, you might consider becoming
the new owner of an existing business.
Let’s look at the benefits and drawbacks of
An established business has done the
hard work of setting up, establishing
customers and generating revenue, so you
will have less work to do. Contrast this to
launching a startup, which will require a lot
of capital upfront, as well as a lot of strategies
and planning to be a success.
Another benefit is that you can have
a clear understanding of what sort of
revenues you can expect. Smart business
buyers ask to see their accounting. Looking
at the business’ financial statements for the
last three to five years, such as cash flow
statements, balance sheets, profit and loss
statements, and personal and business tax
returns can show how financially healthy
the business is and has been.
On the other hand, you may not be able
to find the type of business you are interested
in for sale or at a price you can afford.
You may also inherit liabilities like debt
from the owner, which can add to the cost
of buying a business. In addition, you may
not be aware of any issues with staff, suppliers,
location or zoning until you take over
ownership and see for yourself.
Consider why this person is selling the
business. Is it because it’s flailing and they
want to get out before the ship sinks? You
don’t want to be the one to go down with
WHAT TO CONSIDER BEFORE BUYING A BUSINESS
If you are considering buying a business,
here are some things to consider.
What’s the Real Story?
It’s important to consider why small
business owners sell their businesses. If
they’re planning to retire, that’s one thing.
However, if they have racked up debt and
cannot afford to run the business, then that
becomes your problem.
Find out as much as you can about the
business. Don’t just look at the balance
sheet; talk to employees to see how they
like the company and how it’s run. Examine
equipment to see what kind of shape it’s in.
What Will it Cost?
The purchase price is just one expense
you’ll have in buying an existing business.
If equipment is outdated, you may soon
need to replace it. In addition, consider that
some employees might leave when you
take ownership, so you may need to invest
in hiring new ones.
Also, consider other fees or licenses you
may need to transfer or get in your name
as a new license. Review the requirements
for business licensing in your state so you
know those costs ahead of time and can
ensure you have the cash flow to cover all
Is There Any Debt?
If the business has outstanding loans or
other liabilities, what are they, and will you
be responsible for paying them off? You
may be able to negotiate this as part of the
sale agreement so that you’re not saddled
with debt, which may start you off on the
wrong foot when it comes to building business
What Work Needs to be Done?
You may be able to step into this business
as a turnkey operation and do nothing more
than put your name on your office door. Or
you might have major renovations, hiring,
training or purchases to make. Consider
your new ownership as an opportunity to
make design improvements if the location
you’re buying is run down or in need of a
coat of paint. A few cosmetic tweaks can
communicate to customers that there’s a
new owner eager to serve them well.
Do You Need Help?
You certainly can buy a new business but
it may be helpful to hire a business broker.
They know how to find the kind of business
you’re looking for, and can help with due
diligence and the negotiation process.
HOW TO BUY AN EXISTING BUSINESS
Now let’s look at the steps for how to buy
Step 1: Do Your Due Diligence
It is your responsibility to learn as much
as you can about the business. That means
carefully analyzing financial records and tax
returns or having a CPA or a consultant do
it if you are not clear about what the owner
discloses about the business’ financial
health. You need to look at all the assets including
intellectual property and be aware
of all liabilities.
Also, check its credit history because you
will be inheriting it. If the owner did not pay
any outstanding bills, it will be reflected in
the business credit scores and may affect
your ability to secure future financing.
Step 2: Review the Business Plan
You’ll want to know as much as possible
about business operations, so if the
company has a business plan, ask to see it.
This can give you insight into the previous
owner’s vision for the company and you can
see how well it is aligned with where the
Step 3: Conduct a Business Valuation
The owner will have given you the sale
price, but now it is up to you to do a business
valuation to see how accurate that
price is with the market value of the business.
A business valuation should include
both tangible and intangible assets, including
real estate, monthly retainers, accounts
receivable and debts.
A business broker, accountant or business
consultant like Michael Bernard can help
with these calculations. Ultimately, you’re
trying to determine whether, at the asking
price, you would be able to see a solid return
on investment within a few years.
Step 4: Give Your Letter of Intent
This letter states your intent to purchase
the business, though you can opt out if you
decide it is not the right business. Some
business owners won’t release tax returns
and other financial information until you
give them a letter of intent.
Step 5: Get Your Financing Together
We’ll cover this more in-depth in the next
section, but before you can buy a business,
you need to ensure you have enough cash
to cover not only the sale price but also
those costs you’ve calculated. If you do not
have enough cash you may need to take out
a small business loan.
Step 6: Sign on the Dotted Line
Sign the required legal documents to seal
the deal. Once both parties have signed,
the business is yours.
FINANCING OPTIONS FOR BUYING A BUSINESS
Banks and online lenders are willing to
finance a business acquisition, if you qualify.
You will need good to excellent credit for
the low-interest rates.
Another option is a loan backed by the
Small Business Administration. These also
offer low rates for those who qualify.
Some sellers, particularly those who are
motivated to sell, may be willing to finance
the deal. If you don’t qualify for a low-interest
loan, this may be a good option. You
may be asked to provide a down payment
based on the asking price and then make
monthly payments for a predetermined
period of time.
FIND THE BUSINESS THAT’S RIGHT FOR YOU
Finding the right business that fits your
needs and fulfills your dream will take time,
but if you do your due diligence, you have
the potential to build on top of a well-established
business with your own unique flair.
BY NANCY DAHLBERG AND SUSAN GUILLORY