Some entrepreneurs buy a business rather than start from scratch. Since the business already exists, important information that could affect business decisions already exists, such as the levels of sales, costs, profits, among others.
However, the process of buying a business is not simple; in fact, it is almost similar to starting a new venture. Buying a business requires the same thoroughness as creating a business plan for starting a new business. Even if you find a business that matches your capabilities and can create and maintain customers, you still need to do a thorough analysis to know its real merits.
According to the book “The McGraw-Hill 36-Hour Course: Entrepreneurship” by James Halloran, here are some steps that you should follow when buying a business:
1. Business Must Match Your Objectives and Plans
The business that you are planning to buy should match your personal and financial objectives (preferably those that you have written out in your business plan). You should develop a “target business profile”, listing a set of specific criteria for what you expect and what characteristics you are looking for in an ideal business.
Just like starting a new business, you also need to identify the amount that you are willing to invest, the acceptable level of risk, the minimum expected return, who are the target customers and how you plan to reach them, and the time you can devote to learning and managing the business.
2. Find Potential Businesses to Buy
Locate business opportunities with the potential to grow and offer an attractive return on investment. You can find potential opportunities by reading classified advertisements, discussing opportunities with business brokers, and checking industry sources. Resist the temptation to buy the first business that looks good; step back and look at it objectively.
3. Initial Introduction to the Business to Buy
Make an appointment to see the business sellers or brokers for an initial introduction to the opportunity(ies). They should provide you with brief financial reports, history, price, and reason for sale. This will allow you to know more about the business, how long it has been for sale and the financing adjustments that needs to be made.
4. Meet with Various Stakeholders
If you find the materials presented adequate and the business to be sound, be sure to request for additional meetings to probe for more information. It is important to look at a business at different angles. Request to talk to suppliers, customers
5. Review the business closely, including its facility or office (if any), to determine how well it has been managed and maintained.
For service businesses, talk with the employees and even customers. Prepare a checklist of information needed, which should include the following:
- A complete financial accounting of operations, including all income tax returns and state sales tax forms, for at least the past three years or from the beginning of operations if not established that long.
- Listing of all assets to be transferred to the new owner, including item breakdown of all inventory as of the last accounting period.
- A statement as to any legal action past or pending against the present operation.
- A copy of the business lease or mortgage.
- A list of all major suppliers to the business to include names and addresses of those to contact who are familiar with the operation.
6. Seek the Advice of Professionals
Upon a satisfactory personal examination of all information received the potential buyer should then visit:
- An accountant for further interpretation of financial information.
- The landlord or mortgage holder to inquire about the transfer of the premise to a new owner. In the case of a lease, the expiration date should be discussed and if possible renegotiated to the intentions of the new owner. An on-site review of the facility should be conducted to assure it is in satisfactory condition.
- The chamber of commerce and other local assistance centers to discuss the future of the market and the location.
- Industry representatives presently selling to the business to validate the sales reported and an opinion as to the likelihood of future growth of the business.
7. Observe How the Business is Run
Request permission from the seller to allow you to spend time at the operation observing how things are run. You need to understand the business and know how it works. This period will also allow you to spot if there are any potential problems, from the set-up of the business to employee concerns to overall viability of the business. It is also important to gauge customer satisfaction.
8. Determine a fair price to offer for the business.
It should be noted, however, that there is no universally accepted formula for determining business worth. Some of the approaches include book value and capitalization-of-earnings approach. Before you present your offer to the seller, determine what financing arrangements can be made available through a lending institution or the seller. Present the offer in writing to the seller. Normally, at this point, there will be negotiation. The more information that you have collected and analyzed, the more confident you will be in presenting your case. As the buyer, you will have to use your best persuasion techniques to point out the validity of the offer and the advantages to the seller of accepting the offer. Be prepared to walk away if a major obstacle prevents you from obtaining important objectives.
9. Get Legal Advice
If an agreement is reached contact an attorney to draw up a suitable sales contract and research state records for any liens against the property for failure to pay a debt. You as buyer must go into the process with your accountant and a lawyer experienced in business buy-outs. The contract should be contingent upon examinations of all assets to validate what is represented is true.
10. Finalize the Business Purchase
Before signing a sales contract, the buyer should be present when a final inventory count of assets, including inventory, is taken.
Recommended Books on How to Buy a Business:
- How to Buy and/or Sell a Small Business for Maximum Profit — A Step-by-Step Guide: With Companion CD-ROM
- The Complete Guide to Buying a Business
- How To Buy a Business
- How To Buy Any Business How To Do It, Step By Step: Become A Millionaire In 365 Days
- How to Buy a Great Business With No Cash Down