There are many benefits to buying an existing business, as opposed to starting one from scratch. An existing business is already formed (e.g., registered with the state and structured), has a physical location or online presence, an established customer base, and a working staff.
Having these essential business components in place can save a buyer a significant amount of time, energy, and potentially money, that they would not enjoy if they started a new business. Additionally, purchasing an existing business is not as risky as opening a brand new business.
For instance, since existing businesses typically have verified customers, a network of professional contacts, and a financial history, it can make securing any necessary funding easier (e.g., business loans, investments, etc.). Also, because an existing business is usually cash-positive, any funding required will be lower than what would be needed if the business was just launched.
Some other benefits include the fact that an existing business comes equipped with inventory and machinery; it may have several locations, including ones overseas, which can save a purchaser money if they wish to expand the business; it has possibly established itself already as a household or name brand; and that the business has most likely made some of its worst mistakes or experiments, which will help the purchaser to know what business decisions to avoid.
What Should I Do Before I Even Consider Purchasing an Existing Business?
There are many items to consider and steps to take before purchasing an existing business. One step that is crucial when buying an existing business is that the purchaser must absolutely do its due diligence. This process may involve appraising the existing business and its assets, and making sure that the business is in compliance with all current laws.
Aside from the above, a person looking to buy an existing business should complete the following:
- Know exactly why they want to buy a particular business;
- Have a business plan that proves they can maintain the business’s success;
- Figure out how much money they will need to purchase the business, and how much money they will need to continue covering business expenses (e.g., payroll, utilities, etc.), after they purchase it;
- Request to see the existing business’s current financial, legal, and other important documents, including:
- Bank statements (if possible);
- Tax returns from the last three to five years;
- Legal documents, such as contracts, liens, pending lawsuits, outstanding debts, leases, registered intellectual property, licenses, permits, and so forth;
- A list of inventory, fixtures, furniture, machinery, etc.
- A list of current clients; and/or
- Their current business, marketing, and advertising plans (if any).
- Obtain a credit report and inquire with the Better Business Bureau about the business;
- If possible, speak to the business’s customers and suppliers to gather as much information as possible about its reputation and operations;
- Hire an accountant to review the business’s financial data (e.g., gross profit ratios, net income, total assets, etc.);
- Research the business’s social media presence and how it is rated on review websites (e.g., Yelp!); and
- Finally, if the purchaser is genuinely serious about buying, they should hire an official due diligence team that consists of a broker, banker, accountant, and an attorney.
Hiring a formal due diligence team to assist with the process of purchasing a business can help ensure that an investment is a wise decision and that the purchaser will not be taking on any burdens that they cannot manage.
Specifically, working with a business lawyer for business purchase comes with many benefits at this stage. A lawyer will know which questions to ask the current business owner, can review any legal documents to ensure that a purchase will not pose too large of a risk to the investor, and can use their prior experience in business purchases to tell the buyer when to avoid making a purchase.
Questions You Need to Ask About the Existing Business
There are countless questions that a purchaser should ask an owner before buying their business. Some of the most important questions to ask include:
- Why is the business for sale?
- What does the business’s future look like? (Both in financial terms and its industry). Plus, why the owner believes that is the case.
- What is the business’s current financial status? Is it declining or rising, and why?
- Does the business have any outstanding debts?
- How is the business marketed?
- What are the primary methods that the business uses to attract its customers?
- Are there any key customers, and if so, what would happen if they stopped being customers?
- Has the company changed at all since it was founded? If so, how, and why did it change?
- Does the business own any intellectual property? If so, do ownership rights need to be transferred to the new business owner?
- What contracts (if any) is the business currently involved in?
- Are there any pending lawsuits against the business or its owners?
What to Do During Negotiations
An individual who wishes to buy an existing business should come prepared to negotiation talks, so that they can gain the most value from their investment. Some tips and guidelines to follow for a potentially successful negotiation outcome include:
- Find out what the business is worth before sitting down to negotiate. This can help a person to determine the lowest amount they can offer to purchase the business, as well as to know when a seller’s offering price is too high.
- If a person intends to open with the lowest purchasing price, they should have a list of reasons ready that show why the seller should accept that amount.
- Sometimes, it may be useful to ask a seller “what if” questions (e.g., what if the business loses its best customer). Consider how the seller may respond and be prepared to attack weak answers.
- Always remain calm and be kind when negotiating. Do not make any threats.
- Avoid any discussions regarding the maximum amount a purchaser can afford and the ability to obtain a loan to make up the remaining difference of a price.
- Know precisely what to ask for before going into the negotiation. Make sure to mention it during the negotiation and to specify any points that are important or non-negotiable.
- Understand the different types of contract clauses. There can be anywhere from zero to fifty kinds of clauses included in the final purchase agreement. Be sure to incorporate ones that provide benefits for a purchaser and to steer clear of the clauses that could hurt a purchaser in the long run.
Should I Consult With an Attorney When Purchasing a Business?
Purchasing an existing company can be a very complicated process. There are many variables to consider and you need to be careful that you do not invest in a company that is failing or about to go bankrupt.
Some benefits of working with an attorney for buying a business include knowing the right questions to ask during negotiations, ensuring that a business is legally compliant, and getting advice from a legal expert on what types of clauses should be included in a final contract.
Therefore, if you are considering purchasing a business, it may be in your best interest to consult a local business lawyer before you make any offers. Your lawyer can assist you with the negotiation process, draft and review the terms of your purchase agreement, and provide general guidance that can help get you the best deal for your investment.