Most of the people, who think of becoming an entrepreneur, think they have to start everything from scratch, i.e the groundwork needs to be done including the business ideas, inventories, and every other thing that’s needed in a business. But, one cannot neglect the fact that starting a business from scratch takes a lot of effort and involves a lot of risks. That is when people who want to run a business should give a thought to buying an existing business. This article will talk about how to buy a business and the factors that should be considered before buying the same.
Buying A Prevailing Business
There is no second thought about the fact that running a business that has been already established is much easier than starting from scratch. Buying an existing business means taking over an operation that is pre-established and generates profits and cash flow. One of the biggest perks of taking over such businesses is that the entrepreneur or the new owner does not have to struggle when it comes to setting up clients or hiring employees. Be it gaining a business license, making and setting policies and procedures, everything will be ready when buying a pre-existing business with its operations on.
Everything that comes easy has its downfall. Similarly, buying an existing business too has few demerits. It involves a huge cost when compared to setting up a business from scratch. But again one can get hold of investors as people are more comfortable investing in a business that has a recognized track record. That does not mean that this is a sure-shot technique to make profits. So, to make sure, below are few points that might help a future entrepreneur to make the right choice.
Steps To Consider To Avoid Wrong Choices
Any person who is considering buying an existing business should be sure that the business they selected is right. So often people should consider investing in the field they have an idea about or something they understand. One should think about their skills and experience and then connect it to find the best business it would fit in.
The business size in terms of sales, number of offices in various locations and employees should be considered as well. The geographical area is another important factor that must be considered. Taxes, wages, labor pool asses should be evaluated when selecting the business location.
Once the above has been given a thought to, the next step is to evaluate which business fulfills the above criteria. Newspapers also publish about such opportunities under the head “Business for Sale” or “ Business Opportunities”.
Someone interested to buy a business can also publish an advertisement in the newspaper, and people who match the criteria and wants to sell the business will contact. Hiring a broker, talking to various industrialists, and networking with peers and acquaintances can also help to seal a deal.
Here are a few ways a broker can benefit someone who is looking to buy an existing business.
- Paperwork Assistance
- Negotiation while making a deal
- Helping to explore industries as per one’s skills and interest
- Prescreening business and trying best to avoid risks
Checklist Of Factors That Needs To Be Considered
There are chances that a person might come across many options and get confused about which business to buy. Below are few factors one should consider when making a decision.
A proper inspection of the inventories that are in stock and currently used to serve clients should be considered. The quality, the stock, previous year inventory status, value of the inventory, etc should be considered and paid attention to before buying any business.
2. Building, Equipment, Fixtures, And Furniture
Having a list of the model numbers of all these items along with an analysis of the original price and the current market value makes it easier to decide. This will help to know what further investments are needed to be made after buying the business.
3. Copies Of Legal Documents And Contracts
This is one of the most important things that need to be in place. Every business needs documents to legally bind it that includes paperwork such as employment agreements, union contract, sale contract, subcontractor agreement, distributor agreement, purchase and lease agreements. It is very necessary to evaluate all the above documents along with trademarks, patent rights, etc. One should even find out if the business can be transferred to other’s names or not.
There are situations when a company one is interested to buy is registered as a foreign corporation or in another state. So, finding out this detail in the early stage is important.
5. Tax Returns Documents For The Past 5 Years
There are people who to show a higher figure include their personal spending like shopping, vacation etc include it all in the business accountant. So, one should evaluate the true worth of the firm with the help of an accountant.
6. Last Five Years Financial Statements
Financial books and records of at least 5 years are evaluated and compared to tax returns always. The earning power of the targeted firm can be evaluated through this.
7. Sale Records
Financial statements include the sale record but this should still be doubled checked separately in detail for a minimum of the past 3 years. While going through it, products should be categorized and the mode of payment should also be mentioned. Checking the sales pattern can make a lot of difference when making a decision.
8. Record Of Current Liabilities
Most people overlook considering what are liabilities a firm can bring along. So before buying an existing business, one should know what liabilities they have to carry forward and be liable to clear in the future. Unrecorded liabilities, settlement out-of-court, etc are few liabilities that are missed while evaluating financial statements.
9. OSHA Requirements
Safety concerns are justified. So, a person if not sure about the health requirements and occupational safety can always ask Occupational Safety and Health Administration to conduct an inspection. If the seller is genuine and not hedging, he/she will not mind if the buyer wants to recheck with OSHA requirements.
Apart from the above list, prospective buyers should check and confirm the reputation of the firm they are considering buying. Here are few other factors that should be handy or evaluated
- Organization chart and current employees list
- Analyzing inflated salaries
- Finding out if there are any special or rivalry seller-customer ties
- The market area of the prevailing business and the location should be properly analyzed and studied
- The history of the market and industry
- Account Payables and debt disclosures
- Evaluating the rate of returns and profits
- Marketing strategies used by the firm owners in the past
- Customer Base
After evaluating and checking all of the above, one should decide if they should actually buy that particular firm. In the end, one should not pay an amount that is not justified. The whole process might take time but these scrutinies will make sure that one is not making any wrong decisions and know exactly what they are getting into.