Buying Existing Businesses
For some entrepreneurs, buying an existing business represents less of a risk than starting a new business from scratch. While the opportunity may be less risky in some aspects, you must perform due diligence to ensure that you are fully aware of the terms of the purchase.
If you have decided to buy an existing business, you will want to be sure you are making the right choice in your new venture. Only you can determine the right business for your needs; however, the following topics can help guide you make the best decision.
The Steps to Starting
There are many different types of businesses to buy. Take these steps to narrow down the list of potential businesses you may want to purchase.
Advantages to Choosing an Existing Business
There are many favorable aspects to buying an existing business such as drastic reduction in startup costs. You may be able to jump start your cash flow immediately because of existing inventory and receivables.
Disadvantages to Choosing an Existing Business
There are also some downsides to buying an existing business. Purchasing cost may be much higher than the cost of starting a new business because of the initial business concept, customer base, brand and other fundamental work that has already been done. Also, be aware of hidden problems associated with the business like debts the business is owed that you may not be able to collect.
Doing Due Diligence
As you become a business owner, there are items that need to be addressed before entering into any business agreements or transactions.
Obtain all Licenses and Permits Most businesses need licenses and permits to operate.
The type of license or permit you need depends on your industry and the state in which the business is located. Use SBA’s licenses and permits finder tool to get a listing of federal, state and local permits and licenses you will need to run your business.
Determining the Value of a Business
There are a number of different methods to determine a fair and equitable price for the sale of the business. Here are a few:
Doing Research for Purchasing a Business
Once you have found a business that you would like to buy, it is important to conduct a thorough, objective investigation. The following list includes important information you want to include when researching the business you want to buy.
Letter of Intent: The letter of intent should spell out the proposed price, the terms of the purchase and the conditions for the sale of the business.
Confidentiality Agreement: A confidentiality agreement indicates that you t will not use the information about the seller's business for any purpose other than making the decision to buy it. Contracts and Leases: If the business has a current lease for the location, be aware that you may have to work with the landlord to assume any existing lease on the business premises or negotiate a new lease.
Financial Statements: Examine the financial statements from the business for at least the past three to five years. Also make sure that an audit letter accompanies the statements from a reputable CPA firm. You should not t accept a simple financial review by the business itself.
Tax Returns: Review the business's tax returns from the past three to five years. This will help you determine the profitability of the business as
well as any outstanding tax liability.
Important Documents: Numerous documents should be checked during your investigation. Examples include property documents, customer lists, sales records, advertising materials, employee and manager information and contracts.
Professional Help: A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. Also, an accountant can help with a thorough evaluation of the financial condition of the business.
Sales Agreement for Buying a Business
The sales agreement is the key document to finalize the purchase of the business. This agreement defines everything that you intend to purchase including business assets, customer lists, intellectual property and goodwill. If you do not have a lawyer to help you draft the terms of the sale, you should at least have one review the agreement before you sign it.
Checklist for Closing on a Business
The closing is the final step in the process of buying a business. Keep in mind that you should have legal counsel
available to review all documentation necessary for the transfer of the business.
The following items should be addressed in a closing: