Buying a small business? Then keep it on target

Buying a Small Business – How to avoid the risks

Help in making the right choice of whether building or buying a small business is right for you

The choice of buying a small business or to build your own business from scratch is often the main decision to make before starting your future as a self employed entrepreneur.

Both options have pro’s and con’s and need careful thought before you decide which way to go.

So, whether it’s your first business or your next business move, think carefully before building or buying a small business.

Making Your Next Business Move

Buying a Small Business

It is not easy taking on an existing business but, if you follow good advice, it can be done.

Follow good advice and you will be in business a lot quicker than if you start your own business from scratch.

Here are some suggestions for you on buying a small business

What business to buy… let’s look at the buying of a ready made and already operating business.

This can be done by purchasing a conventional business (production or service); or by buying a franchise or buying a ready packaged business opportunity.

These three types of business have different requirements, and here we will assume that you have decided on the purchase of a conventional business.

  • Buying an existing business :
    • This can often be easier and less risky than starting from nothing and can have many advantages.
    • Usually you don’t have to look for customers, hire employees, market, or worry about cash flow and profits.
    • Even if the business is run down, at least the potential can be there for growth
    • If the business hasn’t been run properly you can still turn it around
    • the purchase can be more expensive than starting a brand new business but raising cash on an existing business can be easier, so the choice is yours.

Things to decide before buying a small business.

Be sure that the business you are looking to buy is right for you. Elsewhere on this site you can find information that will help you in choosing a business

  • Decide on the size of business that you wish to run.
    If you want to own a small business with few employees don’t waste time looking at a 500 employee business.
  • Decide which area you would you like to do business in.
    Buying a small business that is 3 hours from your home is not the thing to do, unless you intend to move nearer to the business.
How to start looking for a business to buy …

Do this initially by checking the newspapers, spreading the word to all your friends and acquaintances, advertising, or contacting business brokers.

A business broker will cost you 5 to 10 percent of the price you finally pay for your new business. This cost can be worthwhile in certain cases. More on business brokers .

Finding a business to buy takes time and sometimes a great deal of research, but sooner or later, you will find something you like.

From then on you need to do all the right things, and ensure the business is properly checked out and that is the one for you.

When you’ve found your ideal small business …

From experience I have found that you can easily be blinded to the shortfalls in a business that you really want. This can be very costly, so beware and check it out before buying a small business by following these guidelines …

  • Find out why the business is for sale. There can be many reasons, some good for the buyer, others not, so find out.
    • The business is doing badly, depending on the reason, can be good or bad for you. Why is it doing badly?
    • The owner wants to retire. Normally such businesses will have been well run and are in good shape.
    • Family reasons can cause a business owner to sell. These reasons might be a death in the family, a divorce, or a need to move to another location.
    • The owner wants to sell to move onto another business. These businesses are usually a good buy from the point of them being well run prior to the sale.
    • Health reasons might force the sale of a business. If the owner has been unwell for some time and allowed the business to run down, be careful that you check it out well before buying. However you might consequently get it cheap.

Other reasons will be given, but the point is to find out why the business is being sold. If the reason is valid, fine. If at all suspicious don’t buy.

  • Does the business produce or provide a service that is in demand and is likely to retain its demand? Buying a small business that is producing goods or services that are no longer in demand is not good.
  • Has the business got a good customer base or is it reliant on one or two customers? The greater its market share and spread of customers the better.
  • The company has a good reputation doesn’t it? If the company is known for poor quality and poor service, be very wary of buying. You could turn it around, but check out your potential customers before buying.
  • Are the business raw material sources or general suppliers reliable and assured? The seller might be getting out because a vital supplier is moving or closing down.
  • Check before buying a small business for any complaints pending against it by contacting the Better Business Bureau.
Right, how are you doing? A lot to do and get right so let’s stop a moment and move on to the people you need help from in your search for the right business.
The all important A’s and B – Accountant, Attorney and Banker …

Your accountant, attorney and banker are the three professionals you will need sooner or later.

Being on good terms with your banker or potential banker makes good business sense, but having a good accountant and attorney are vital.

Modern business is a tangle of legal permit and tax issues. It is possible you can wade through them yourself, but they really should be left to your accountant and lawyer.

Selecting good people who can help you is vital, how to recruit is discussed elsewhere.

Use these professionals to check all the following items with and for you …

Check the business financials and all the current trading returns
  • Financial Statements
    Ask for and get the prospective company financial statements for at least, the last 3 years. These need to be final statements that have been reviewed and authorized by the company accountant.

    • Together with these also review the tax returns for the same period of 3 years. Your accountant is important here, so get his opinion.
    • Remember that financial statements can be prepared for the tax people and bear little resemblance to fact.
    • Don’t believe everything you read and don’t pay for unproved income.
    • A wink and a nudge is not good enough to prove the seller’s claims of vast off book profits.
  • Assets or Business, which to buy? …
    In many ways, it is advisable to try and buy the assets of a business and not buy a small business itself. WHY?

    • When buying a small business, if you buy the assets only, from the tax point of view, your tax base will be at the cost of the purchase and not the original cost to the seller. This can amount to a substantial sum.
    • Another good reason not to buy the business is that if money is owed by the business you will not be liable for any of it, if you have purchased only the assets and not the liabilities.
    • The disadvantages of trying to buy the assets only are that it can be expensive, if the owner wants to sell his liabilities as well as the assets.
    • Play this one carefully to ensure that you get the best deal …
      I had some bitter experience of this when I bought the assets of a business and registered a new company to handle them. Good business practice, but unknown to me, the new company name I had chosen had at some previous time been allocated to another business that had gone into liquidation.

      As soon as I was up and running with my new name, some previous suppliers of the original company thought that the company that owed them money was back in business, and here was their chance to get their money back.

      The next thing I knew was when a collection agent was on the door step with a summons. I was quick to point out that my company had only been registered 4 months previously and so it was impossible to have owned monies from 5 years previously. It took some sorting out but it was done eventually.

    • Another thing to do when buying a small business is to physically check that all the mechanical and electrical assets are in fact in working order. Be very careful and check all current asset values are up-to-date before buying.
  • Inventory
    It is often the case when buying a small business that you do have to buy all of its liabilities.
    • One of these liabilities can be its slow or un-saleable inventory. Check what inventory you are buying and if it is still saleable but very slow moving inventory
    • Try to get a reduction in price on those items before you settle on a buying price.
    • If there is redundant or obsolete raw materials don’t pay current or new item prices.
  • Accounts Receivable
    Another thing to watch out for is the amount of money owed to the business you are buying.

    • You can either purchase the accounts receivable with the business or allow the seller to collect them for himself after you purchase. I recommend looking carefully at receivables; they can be an asset or a drag on the business.
    • If they are going to be difficult to collect, they could become a real burden on the business, so let the seller have them. Otherwise keep them, as once collected you will still have the customer, for future sales. I favor this way, but you will have to make up your own mind regarding accounts receivable.
  • Employees
    Before buying a small business, realize that the existing employees are vital to your future success.

    • Initially they will know far more about the business than you do, so make sure that they are going to stay with you after you buy.
    • If you lose your key employees, your life could become an instant nightmare, so ensure that they will be prepared to work for a new employer, after you buy.
    • Meet employees individually before buying and get them on your side.

A Smooth Business Change over … Essential when buying a business.

In 99% of all cases, it will be essential that the previous owner of your new business remains on hand to help out for at least a few weeks and maybe even for months, depending on the business that you are buying.

Build a clause into the purchase agreement to this effect.

Although, you may have to pay the seller for the time spent with you,it is well worth it to know that you have someone to call on when needed.

Use the seller to teach you the business, introduce you to the customers and suppliers and help with the many queries you will have initially.

Your lawyer, accountant and the sale agreement.

Ask your attorney to check everything before finally buying a small business. Here are some of the things that need to be checked.

Due Diligence Checks …

  • Financial statements including balance sheets, income statement, tax returns, cash flow.
  • Check the net income by looking at all the ratios.
  • Check the working capital
  • The legal status of the business ..,
    • Are there any lawsuits pending or disputes with labor?
    • Is the business clear and free of liens and other debts?
    • Check all contracts the business might have with suppliers and customers.
    • Check for any pending changes in zoning regulations, state or federal legislation.
  • Draw up or review the final sales agreement.
  • Cover yourself in the final contract with an indemnity from the seller, that guards against anything the seller forgot to tell you, or the seller did or didn’t do.
Read the Business Checklist to ensure you get answers to all the questions you need to ask the seller of a business.

Business Paying for New Business

The Price to Pay for Your New Business …

Finally having done all the work, made all the checks and satisfied yourself the business is right for you. There is one final thing to do before buying a small business – negotiate the price.

Negotiating The price you pay …

Let the seller start by asking him the price. Don’t offer a price, always let the seller start the ball rolling.

Only when you have agreed on a price, do you discuss the means of payment.

You could pay cash, or a percentage in cash, usually between 25 and 50 percent, or finance the purchase.

The finance can come from a lender such as a bank and in the form of a long term loan, or even from relatives who still love you or you could pay with a promissory note or a mortgage agreement.

Take professional advice and run all proposals by your attorney and accountant before finally buying a small business.

Well I think that is it, you should be confident of owning your own business. From here on you are your own boss and the buck stops with you. Take your future, run with it and you are sure to succeed. Buying a small business can be fun and profitable.iDex7 Web Design