In today's Freedom Friday blog and email newsletter, I want to talk about a very common issue that I get from prospective clients, and that is, “I want to buy an existing business, can you help me get a business agreement together?” I will always ask them if it has already been negotiated, and usually the answer is, “Mostly yes.” That means that the business purchaser may not have done all their homework about what they're getting into. In today's Freedom Friday blog and email newsletter, I want to talk about the seven steps to buy an existing business:
What Should You Consider When Buying an Existing Business
The first step to buy an existing business is what you should consider when buying an existing business. There are advantages and disadvantages to buying an existing business. There may be a higher up-front cost, but there are other considerations, as well. For example, an existing business may come with existing debts that are owed to the business, but which cannot be collected, or could come saddled with debts that the business owes to others because of poor management. You also might be getting employees you did not hire and who may not be up for the change in ownership. You can also spend a lot of time evaluating businesses if you comparison shop. For any business you might be considering buying, you need to look at the health and building inspections, and a financial analysis. However, an existing business also will have less risk. You need to determine the health of the business itself by reviewing profit and loss statements, sales history, demonstrated market, and pricing. You may also acquire intellectual property which needs to be protected, and/or an inventory of tangible assets.
Why the Business is For Sale
The second step to buy an existing business is learning why the business is for sale. Businesses for sale are not always failing; sometimes a business owner needs to sell other reasons, such as desiring a new lifestyle, being bored with running a business instead of creating a new one, being excited about a new idea, or wanting to retire.
What Type of Business You Should Purchase
The third step to buying an existing business is to choose the type of business you should purchase. You need to consider the location, size, and industry of the business, along with your lifestyle.
The fourth step to buying an existing business is to research your options. Don't start with Google. The Internet is full of scams, illegitimate business offerings, and too much information (TMI). Talk with your friends and associates. One of them may be able to refer you to someone interested in selling his or her business. Also, talk with the customers, owners, and vendors of the type of business you're interested in operating. If you find nothing available, you can use your computer to look online. If you find a business you're interested in buying, check out ratings and complaints on the Better Business Bureau website. You might also consult with a business broker who can help you by prescreening businesses, help you determine the business you want, and negotiate the terms of the sale.
The fifth step to buying a business is due diligence. Once you've found a potential business to buy, you need to do your due diligence. This includes getting an independent valuation of the business you want to buy. Is it financially healthy? How much is it worth? Does the owner have relationships that won't transfer the business to a new owner? Your CPA should evaluate the financials of the business to make sure they're legitimate. You also should run a credit check on the owner to make sure you're not going to get massive debt or other issues. Make sure all the licenses and permits as well as any zoning requirements are in order.
The sixth step to buying a business is to acquire funding. Unless you got a big nest egg, you need a way to pay for the business. A popular way of paying for the business is through seller financing. The seller allows you to make monthly payments including interest over a period of time. Another approach is to obtain a business loan from a bank. However, your personal finances will be a major part of whether you can get a loan from a bank. You can also go with an angel investor or venture capital. But they will have an equity interest in your company and so you will lose some profit. But if the business fails, you won't be stuck with the debt.
Make the Purchase
There will be a lot of paperwork in closing the deal. For a business sale, there will be a letter of intent, confidentiality agreements, contracts and possibly leases, financial statements and tax returns, property documents and customer lists, and a sales agreement detailing the business assets and property you're buying.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/