Buying an existing business is less risky than starting a business of your own from scratch. When you purchase an existing business, you can hit the ground running and take over an operation or franchise that has already been established. Buying an existing business has many benefits since you have an already established customer base, business reputation, and the business has already been generating cash flow and profits. There are several things that must be considered before buying an existing business.
Once you have found the right and suitable type of business that you want to buy and invest in, it is important to verify the state of the business before you make an offer for purchase. This involves investigating all the advantages and disadvantages of buying an existing business.
Advantages of Buying an Existing Business
There are several advantages to buying an existing business as opposed to starting your own business from scratch:
- Saves Time: Buying a business that has already been established will save you lots of time since you already take over something that has its own inventory, presence in the area, customer base, and cash flow and profits.
- Existing Business Evaluation: Buying an existing business will permit you to evaluate its cash flow and working expenses, giving an existing idea of what capital you will need to begin. When you start business from scratch, these figures are much more difficult to guess which creates higher risks.
- Negotiation Flexibility: There is far more room to negotiate with the purchase price when your buying an existing business.
- Risks are Reduced: There are reduced risks and a greater chance of getting financial help since there is an existing track record, staff, supplies, inventory, and cash flow.
Should I Buy a Franchise as an Existing Business?
Franchises also have their own advantages and disadvantages. Buying a business franchise is like starting your own business since it has no existing customer base and most of the time you have to build the business to replicate the franchise brand that you purchased. However, unlike starting a business on your own when you purchase a franchise, you have a parent company instructing you how to control the business and you would have to share some profit to the franchise company. Here are some advantages and disadvantages of buying into a franchise:
- The failure of buying a franchise business is less than 5% according to the National Franchise Association
- Operating costs for franchise businesses are much lower
- Franchise businesses receive lots of support from the franchise company such as advertising costs, accounting, training, and options for financing
- Franchisers can help with business financing, legal assistance, site selection, and management help.
Tips for Moving Forward in Buying an Existing Business
If you've already made the decision to purchase an existing business, you may still have some questions to decide whether a business is the right choice for you. Here are some recommendations to help you start on your track to profits and success.
- Talk to a business broker: Business brokers have expert information of the buying and selling procedure. They also have real-world knowledge and can offer great advice. They normally get paid commission, so you need to find one you can trust.
- Check the credit history: Check the credit history of the seller to ensure there is no hidden business debt.
- Talk to the customers: Talk to existing business customers to give you a better and honest feel for the business.
- Talk to the owner: The more you talk with the current owner, the more information you can gain about the business itself
- Talk to employees. This will help familiarize you with the business and give you a better idea how the business is currently going.
Negotiate the best deal possible: Negotiate as much as you can about all aspects of the business and see if you can end up with the best deal possible and if any extras the seller might throw in the deal.
Make it legal. For your own protection, ensure that everything that you negotiate and determine during the purchase is put in writing or a business contract. It is also important to get legal advice from an independent business attorney
The Ultimate Guide to Selling a Business?
Selling a business is a tough task and there are many things you have to do to sell your business properly. Every business owner must have a successful business plan that will give him or her with the most protection as possible. Here is a checklist on what to do when selling your business:
- Collect all accounts receivables to all the customers who owe you money before you notify them that you are closing the business.
- Sell of all existing inventory unless you are including it with the purchase price.
- Notify all your creditors, suppliers, lenders and give them a time limit on when they can ask for a debt.
- Terminate all your existing commercial leases.
- Notify all the parties that you have existing contractual obligations with.
- Notify and compensate all your employees.
- Liquidate all your business assets.
- Make all your final and state payroll deposits.
- File your final employment related tax return (IRS Form 940, IRS Form 941).
- Dissolve your corporation, LLC, or Partnership.
When Is a Good Time to Sell a Business?
The timing of selling your business is very important since there are many procedures and duties that you must take care of before actually selling or winding the business down. Prepare for the sale as early as possible. Usually a good time to sell a business is a year or two years ahead of time. The preparation will help you improve your financial record of the business; create a solid business structure, and customer base to make the business more profitable. These business improvements will make the business have a better record for sale and will ease the transition for the buyer to keep the business running smoothly. A business sale may take six months to two years according to the U.S Small Business Administration.
What Needs to Be Prepared in Order to Sell a Business?
Once that you have decided you want to sell your business, there are many things that you need to prepare for a potential buyer to be able to look at. When a buyer likes the business, the records of the business have to be prepared adequately and ready to be shown at request. Delay in producing these records may cause the buyer to make an offer on a similar business somewhere else. Be sure to have the following on hand before you put you business on the market:
- Last three years of profit-and-loss statements
- Last three years balance sheet
- Year-to-date profit-and-loss statement
- Current balance sheet
- Last three years full tax returns
- List of fixtures, equipment, and furniture
- List of business inventory
- Commercial property appraisal or lease agreement
- Available employment agreement
What Are some Legal Issues to Consider when Selling a Business?
Selling a business is major assignment that can involve many different steps and legal issues. Some
legal issues that can exist during a business sale can include:
- Outstanding debts
- Unpaid tax issues (property tax issues)
- Maintaining business ties with previous contacts
- Business succession issues or transferring the business to a new buyer
- Dealing with private information and confidential matters (employee information, trade secrets, copyrighted info, etc.)
- Dealing with Employment contracts
Should I Consult an Attorney When Buying or Selling a Business?
Buying and selling a business involves many negotiations and contracts. A business attorney can assist you in the entire business purchaser or sell process and also the negotiation process to help you get what you want for your future business. An attorney can also help you sift through financial documents to determine what is relevant to the sales transaction. A lawyer can also arrange the real estate sales process, should you ultimately wish to buy or sell the business property.