Purchasing an established or existing business can lighten the burden of start-up costs, lag time without a salary, establishing markets, and other costs associated with the creation of a new business.
Established businesses may have existing good will – intangible (non-monetary) assets such as reputation or historical value. The decision to buy a business requires careful evaluation of many factors, including pricing and financing your purchase.
The potential buyer must understand the criteria for selecting a business as well as the motivation for wanting to purchase the business.
Consideration should be given to the following:
• What is your experience with the industry and/or management?
• Does the business match your strengths?
• Is the business what you enjoy doing?
• Is it in a desirable location?
• What are you willing to invest?
• Can you get financing?
• What size business do you desire in terms of sales, profit, and employees?
• Is the business fairly priced?
• Is it profitable?
If the business under consideration has a product or service outside your area of expertise, it is important to make certain that the key employees will stay after the sale or that you can hire someone with similar experience.
Finding a business for sale
Finding a good business opportunity is not always easy. Sources to consider:
• Printed advertisements
• Trade sources and suppliers in the industry
• Friends and acquaintances
• Intermediaries such as business brokers, real estate brokers or acquisition specialists
Evaluating the business
As a buyer, first evaluate a business by reviewing its history and the way it operates. Develop an understanding of the business’ method of acquiring and serving its customers, determine how it generates its sales, learn its marketing strategy, and develop an understanding of its finance and operations functions.
Obtain the following information from the existing business.
• 3-5 years financial statements
• 3-5 years tax returns
• Interim financial statements
• Copies of all real estate, leases, or deeds
• Debt schedule
• Accounts receivable and aging schedule
• Accounts payable and aging schedule
• Inventory list
• Supplier list (including contracts)
• Customer list (including contracts)
• Organizational charts and employee contracts
• Industry information to which the owners may have access
• Details of equipment leases and other contingent financial commitments
Evaluate the business’ potential according to your goals, employer responsibilities, product or service demand, market, and financial considerations.
Ask and get answers to questions regarding all aspects of an existing business before entering any purchase agreements. Start with basic questions, like those listed below. Others may be required depending on the specific business:
• Why is the business for sale? Has it been making a profit? If not, do you have a plan to make the business profitable?
• What kind of reputation does the establishment have currently? How would you change that reputation? What is the price of good will? What is the consistency of the client base – a few large clients or many smaller customers?
• Will the sale include equipment, property, inventory, debts, employee contracts, name, logo, slogans, signage, customer files, etc.?
• Are all of the books in order and well maintained?
• Have you reviewed the past and current financial statements with the counsel of an accountant?
• Are there any liens against the property for sale? Are there any claims on inventory or equipment? Have the taxes been paid to date?
• Have you reviewed existing business contracts and the effect of the transaction on those contracts?
• Are they loyal because of a personal relationship or because of the level of quality service?
• Will the lease be transferred into your name or will the owner require a new lease? Is the location suitable for your plans? Are there any environmental concerns with this location? Are there licensing concerns?
• What liabilities exist?
• What policies have been established with the employees regarding work environment, salary/commissions, benefits, vacation pay, and fringe benefits?
• Will the owner be cooperative with the transition of ownership with regard to tax issues, utility transfers, government requirements, employees, and other procedures?
• Are there any environmental issues with respect to your chosen business?
• If using a broker, do you realize s/he is representing the interest of the seller?
• Is the seller willing to sign a non-compete agreement?
• Will the seller agree to a contractual arrangement for a period of consultation?
• Consider whether owner is willing to finance all or some of the purchase price.
The services of an accountant, lawyer, and banker are recommended when buying an existing business. Investigation and research will be crucial to uncovering as much information as possible about the business for sale.