Advantages of Buying a Business
A clear advantage to buying a business rather than beginning from scratch is that you skip the risk-filled startup phase, which can last up to 3 years. Instead of wondering how a startup will get off the ground and grow, you can learn from the history and past mistakes of an existing business and improve upon its success.
Another advantage to buying an existing business is that you’ll be doing business right away, much faster than with a startup. Existing businesses come with suppliers, customers, employees, equipment, cash flow and systems in place, as well as records of the permits and licenses it needs. Zoning requirements have been met. There is most likely an online presence and public awareness of the business name.
With the business’ existing track record, it may be easier for you to get financing. Relationships, goodwill and reputations are established. Advice from the previous owner could help you transition with a formal mentorship agreement. There will always be new challenges, but the business should experience innovation and creativity with you as the new owner.
Questions to Answer Before You Buy
The key to successfully purchasing a business is to fully investigate before you commit yourself. It is important to find suitable answers to the following questions. The rest of this guide reviews various components of business and the information that should be gathered in order to make a comprehensive decision.
Important topics to review include:
- Taxes and legal issues – Don’t take on anything unresolved.
- Receivables and payables – Are accounts up-to-date? Any liabilities?
- Inventory – What quantities will you start with?
- Real estate – Is the property suitable? What are the terms of the lease?
- Equipment – Is equipment included and depreciated accurately?
- Employees –Be prepared to make adjustments in salaries and roles.
When you decide to buy a business, there’s a lot to examine and understand. It is prudent to get professional advice from your lawyer, your accountant and even a business valuation expert. Before meeting with professionals, think about the following considerations, based on the information you have at hand from the seller and other sources.
- What’s the future of your product / service and industry?
- Does the physical location have a positive or negative impact on sales?
- Have all sales been reliably recorded?
- Are the total sales broken down by product line, if applicable?
- What are the monthly / annual sales patterns? Is it consistent and explicable?
- Are sales fluctuations due to particular promotional campaigns?
- Can sales increase with current resource levels?
- Are sales figures solely from this location?
- Is there a salesperson who contributes significantly to success?
- How do / will sales fluctuations affect costs and profits?
- What annual expenses are due soon?
- What new or increased expenses should you anticipate?
- Must staff salaries be adjusted soon? What is your salary?
- What expenses are allocated to which product, if applicable?
- How would a change in product ‘mix’ affect expenses?
- Will existing supplier and cost of goods be available to you?
- Is another business involved in the accumulation or payment of expenses?
- Have some expenses been delayed (e.g., equipment maintenance, inventory)?
Transaction and Carry-over Expenses
- Have you considered the potential cost of the GST on the sale of assets?
- Have you allowed for extra cash flow to cover initial expenses?
- Are bad debts deducted from records or still shown as receivables?
- Is interest paid for money lent to the business prior to your ownership?
- Does equipment value reflect reasonable annual depreciation?
- Did the seller prepay some expenses? Must you reimburse them for your share?
- Do you know minimum and maximum past sales?
- Are profits steady enough to take risks or plan for contingencies?
- Have records been well kept?
- Have you analyzed balance sheets, profit and loss, and cash flow statements?
- Have you analyzed tax returns, purchase records, and bank statements?
- Based on past results, have you projected future cash flow and profitability?
- Is there inventory sold but not shipped?
- Are intangibles like business name, mailing lists, intellectual property included?
- Is it a limited company or corporation? Are you buying assets or shares?
- What is not included in the offer to purchase in writing?
- Is equipment in good repair? Efficient? Up-to-date? Easy to service? Saleable?
- Is some equipment leased? At what cost?
- Is inventory accurately shown?
- Are the assets paid for and free of debt?
- Why is the business for sale?
- Is the seller co-operative in supplying information?
- Will the seller agree not to set up in competition for an agreed time?
- Will the seller train and assist you after the purchase?
- Are there contingencies such as warranties or guaranteed accounts?
- Are you assuming any risk of liability for the seller’s previous actions?
- Will customers expect refunds or honour warranties?
- How’s the business credit rating with suppliers and lenders?
- Will cash flow cover the debts?
The Purchase Agreement
- Are you ready to negotiate?
- Does the contract of sale cover assets to be purchased and liabilities to be assumed when the business is to be taken over?
- Have you included escape clauses in the proposed contract covering: financing, inspecting records, receiving licenses, rights and other transfers?
- Has the agreement, at the least, been reviewed by a lawyer and accountant or valuation specialist?
Determining Price or Value of a Business
How much is a business worth? Is the asking price within your means?
Pricing a business is not an exact science and several methods are commonly used to arrive at a price. Each method has some value and you can use a number of the methods to arrive at a range of prices which you can use to set an asking price or use in negotiating if you are buying.
To find a price we must value the company. We can use a number of approaches:
- Book value: net worth of company (assets minus liabilities)
- Liquidation value: company is set to sell all its assets, pay off all its debts, including taxes, and distribute the surplus to its shareholders
- Discounted cash flow: Value is based on the future cash flow
- Going concern value: Factors advantages such as well trained staff, established systems, and brand power
Be sure to speak to a professional who understand valuation, as well as fair market and book prices before purchasing a business.