5 Things to Know Before Buying an Existing Business
Being an entrepreneur is anything but easy, even when your intention is to take over an existing business instead of starting a new venture. However, it's safe to assume that buying an already established business doesn't involve as much risk as one would have to undertake when starting from scratch. Doing the necessary homework is required even in this case, and it could potentially save you from experiencing buyer's remorse and better help in managing different aspects that might otherwise cause difficulties.
With your expertise and the newly acquired firm's established reputation, you can not only thrive but also provide an exciting new direction towards consumer welfare. Or you may even take over a struggling company and help it to rehabilitate. But before you sign and deal and take over ownership, it's crucial that you consider certain factors to ensure everything goes smoothly.
5 Important Things That You Should Know Before You Buy an Existing Business For Sale
1. Why is the founder selling?
People have a common misconception that entrepreneurs only sell businesses when something is going dramatically wrong. This idea is incorrect because founders may choose to sell for a variety of reasons that go far beyond weak finances or lack of direction. If you take a look at some of the major acquisitions in the USA, you'll find that rarely any company has been sold because of diminishing profits or failure to keep up with competition.
Verizon, a New York City based wireless telecommunications company, is currently on a buying spree as they've taken ownership of many global companies like Yahoo, FleetMatics, AOL Communications, Complex, etc. Digging a bit deeper to find out the reasons for the acquisitions, you'll no doubt conclude that the companies were not sold solely because they were sick. Knowing the intention behind sales will help you get a better deal as well as much needed information about its ongoing status.
2. How much is the business worth?
Finding the net value of a business is vital because it would allow you to make a better bargain and may help you set a better price if your intention is Buying an existing business for sale. A company that looks like an attractive proposition may not be right for you as might be hiding serious issues. So, round up your acquisitions team and get started on finding the businesses health and value.
Three methods can be used to conduct the value analysis are:
- Capitalized Earnings Approach
- Excess Earnings Method
- Tangible Assets Method
While every method has its pros and cons, having a professional accountant by your side to evaluate the business's financials can be of great help. Remember, you're taking on a huge liability, and it would be wise to leave nothing to chance.
3. How much capital do I have?
If you're looking at Businesses for sale in New York City or other major states in the USA, be prepared to undertake a considerable risk because it's unlikely that you'll find a reasonable investment opportunity. However, states like Connecticut, Rhode Island, Delaware, etc. may have relatively small scale business ventures on offer to those who lack in capital. You may have the money to take over the business, but funding to cover working capital expenses such as inventories, payroll, rent, etc. would also require you to have a significant amount of capital.
Correctly analyze your current cash flow to determine the amount you can devote to the operations of the new business. Unless you're extremely wealthy or have financial backing, you'll likely require funding for the acquisition. Some sources for funding can be Seller financing, Venture Capital or Angel Investors, and Business loan. Since each source comes with its quirks, do the necessary research and consult an independent financial advisor to make the best choice.
4. What happens after the sale?
Once you've negotiated the terms and secured necessary funding, all that would be remaining are preparing the agreement draft and sign the contract to finalize the deal. It's important to have a notable acquisitions attorney looking over the details so that no ambiguity might cause trouble later.
Clear and honest communication with the owner(s) of the existing business can be useful for a knowing various issues such as:
- Future status of the employees after the acquisition
- What the owner intends to do after sale
- If the owner can help you aid in smooth transition
- Status of client accounts and their prospects
- Other liabilities that would be your responsibility
So, do not be afraid of asking questions and make sure you're satisfied with every possible detail to ensure a worry-free transaction.
5. What is my exit strategy?
Businesses for sale in Los Angeles and other major states and cities happen by the thousands every day! And many of these firms do not even see the light of the day after acquisition for a myriad of reasons. There's always a chance of your business failing regardless of your efforts, you wanting to sell the firm, or at the very least take retirement at a particular point in time. Having a ready to execute exit strategy can not only protect you from experiencing a backlash of the economy but also help plan for a better future.
Carefully observe the state of affairs of your business so that it's possible to ascertain a point where the company would reach a potential for profit or sales, or maybe even a combination of both. Consult with an experienced business lawyer when making a purchase as big as this, especially when you're about to inherit established infrastructure and client base. This is called due diligence in professional terms, but for entrepreneurs, it's just basic sense.
Deciding to buy an existing business and how you manage the operations will impact not only your life but also your community and lives of your employees. Making a transaction such as this is no easy entrepreneurial feat, and it demands proper connections, the presence of mind, and countless hours of hard work. But when everything is done right, it shouldn't be long till your effective business model starts making you money.