The most common fear among business owners – the fear that their business will fail – is not unfounded. According to statistics, over 20% of small businesses fail in their first year, and as much as 50% of them in the first five years. Still, there are many advantages and opportunities that come with owning a business, and you can avoid the growing pains by simply buying a business.
Obviously, it’s a more expensive option, but you get a business that has customers, employees, products, and cash flow. However, just because you are not starting a business from scratch doesn’t mean that there aren’t any risks involved, especially if you haven’t done your homework beforehand. To avoid the most common problem when buying an existing business, be sure to check out the following tips:
1. Decide What Kind of Business You Want to Buy
The most obvious way to buy an existing one is to buy something you are already familiar with or even passionate about. For example, if you have been a bartender for many years, you can want to look into buying a bar. Also, if the company you’ve been working at for a long time is up for sale, it makes sense for you to buy it because you know all the ins and outs of it.
The second option would be to buy a business because it’s profitable, in which case it would be in your best interest to learn more about the niche and the customers, products, services, and industry trends. The more you know, the better you will be able to anticipate customer or market demands or even come up with innovations of your own.
2. Conduct Your Due Diligence
Even if it seems like you’re getting a really good deal, you should always conduct due diligence to see if there aren’t any legal or financial issues that might prevent the sale or functioning of the business. You need to do this with the help of an attorney and an accountant. Your attorney will not only help you put together key documents but also check if the business is involved in any legal disputes. They may also check the business’ tax returns.
Your accountant, on the other hand, will check the financial statements from previous years and make sure there aren’t any outstanding debts or hidden costs that might add to the purchase price of the business.
3. Determine the Price of the Business
Now, it’s very likely that you and the person or legal entity that is selling the business will have different ideas about its value, which is why you may need to get a third party involved to evaluate the business. Valuation services are not cheap, but they can save you much more in the long run.
There are several different evaluation methods based on which a business can be valued, such as the earnings, assets, or market approach:
- Earnings approach – suitable when buying a business that is already profitable or is predicted to become profitable
- Assets approach – good for buying a business in capital-intensive industries such as transport, telecommunications, oil production and refining, car manufacturing, and so on
- Market approach – if you need to take into account local factors or if you want to confirm a price you arrived at with one of the previous two approaches
4. Check the Growth Potential
Even if you would be more than satisfied with your new business bringing in the same kind of profit as it did for its previous owner, you should still check if there is room for growth. Unexpected changes in the market or in the industry may diminish your profits over time, and being able to expand could mitigate that and then some.
Check if there are any obstacles to expanding your operations by working longer hours, targeting additional markets, hiring additional staff, or pursuing new sales channels. Also, check for potential location issues and market saturation.
5. Secure Funding for the Business
Using your own money to buy a business is the most elegant option, but check with your accountant first, because you will also need to have some capital in order to run a business. You can also consider other funding options, such as partnering up with someone or even enabling employees to buy company stocks.
It’s also easier to get an acquisition loan from the bank or lenders for a business that is already running as opposed to getting off the ground. In this case, however, you will also be required to put a downpayment and provide a business plan and future projections.
6. Finalize the Deal
Once you have done all the steps above, it’s time to finalize the deal and get all of the documents and agreements in order, such as the purchase agreement, which serves as proof of sale and the transfer of ownership from the seller to you. Depending on the type of business you are buying, you may also want to ask for vehicle documentation or existing patents, copyrights, and trademarks.
It would also be a good idea to ask the seller to sign a non-compete clause, which would prevent them from opening the same kind of business in the near vicinity, for example.
Over to You
Buying a business is an exciting prospect, but it can also turn into a nightmare if you are not prepared. We hope these tips will help you overcome all of the obstacles and that your new business will thrive under your ownership. Good luck!
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