Buying an Existing Business: You think you have what it takes to be an entrepreneur, but would rather not start with a new idea. Perhaps, you don’t have new idea worth starting, you may be a great candidate to buy an existing business instead.
Buying a business is a big decision. It typically involves more upfront cost, it also presents less risk than starting from scratch. Financially, you’re looking at actual profit and loss records rather than rough estimates. It’s best because it lets you skip past some of the pain points and costs of starting a new business.
On this article, you get to understand all it takes in buying an existing business. But before moving forward let’s first understand why one most consider buying an already existing business.
Why Should You Consider Buying an Existing Business?
There are several reasons you might consider buying a business that’s already in operation.
Extend Your Brand’s Reach
Purchasing an existing business can help you expand your own. If you only have one location, for instance, purchasing other businesses for sale can extend your brand’s awareness and can lead to better revenue. Consumers like convenience; if they can buy your product or service while having to travel less time to get it.
Reach Out into a New Industry
Even if you don’t need or want to run multiple locations of the same business, buying another business can still be a good option if you want to get into a new or related industry.
Whether you want to branch out slowly into an industry that complements your existing type of business and can tap into your current customer base or you want to do something completely different, purchasing a profitable existing business can help you do that.
Remove Competition Early
If you run a fantastic Italian restaurant but hear about a pizza place going up a bit too close for comfort, you might want to look at buying out the current owner right away before they get established. It allows you to hang on to your market share while expanding your offerings.
Acquire Competitor Ideas
It’s generally considered bad form — and in many cases, it’s illegal — to simply steal your competitors’ ideas. If you purchase their business, however, those ideas can become yours, free to use in your own way.
The Time is Right
Even if you aren’t looking to expand or get into anything new, sometimes it’s just a good time to make the leap. Perhaps you heard about a business with a great location and potential that’s up for sale.
Perhaps you’re sitting on a large cash surplus and are looking for a new investment, and the potential value of the business is enough to pique your interest.
Acquiring an existing business isn’t as simple as making an offer and exchanging some cash. There are quite a few steps you’ll need to take throughout the process.
Below are briefly outlined steps to take, before becoming a business owner of an already existing business;
Figure out what type of business you want to buy.
Search for businesses that are for sale.
Understand why an existing business is up for sale to determine any risks.
Narrow in on a business to buy based on your budget, resources, and goals.
Do your due diligence.
Evaluate the price of the business with the earnings, asset, or market approach.
Secure the capital needed to make the purchase.
Close the deal with the appropriate documents.
Having known the steps, lets now highlight the things you need to watch out for in business acquisition.
Things to Watch Out for in Business Acquisition
Below are the things to watch out for; also what to have in mind in acquiring an already exiting business.
Long before you decide to acquire a business, there is a large amount of information you’ll need to understand about what you’re buying so you can decide if the price of the business is worth it. Most information about business assets can be gleaned via balance sheets and other financial statements.
A few questions you’ll need to ask while evaluating the financial health of the business are:
How much annual revenue does the business bring in?
What’s their cash flow analysis?
What assets does the business own, and how much are they worth?
What about earned multiples, such as price/earnings ratio?
The bottom line numbers are just the beginning. You’ll also need to know about the existing business model, overhead, employment agreements, and other operational details that go into the day-to-day aspects of running a business.
Negotiating an Acquisition Deal
As you move through the business purchase, over a period of time you’re going to arrive at the negotiation stage, during which you and the business’ current owner start talking terms before drawing up a sales agreement. Here are a few tips to consider:
Address the cost of acquisition early. What are they asking for the business, and what will that price cost you in terms of financing if you need it?
Consider implementing holdbacks. This is when you literally hold back a portion of the purchase price at closing to ensure the seller meets a certain condition, such as having a specific working capital threshold.
Verify business ownership. You could find out the person running the business has another partner, or it’s owned by a family rather than one person.
Outline future liability and risk. Buying the business isn’t the goal; making or keeping it profitable is.
Discuss current employees and benefits. Make sure you understand what the current owner offers their employees.
Consider the assets of the business and overall terms of the deal — not just the price. The price might be great, but you’ll want to ensure that all of the other terms of the deal are also to your liking.
Keep contingent concessions but use them sparingly. If the current owner simply won’t budge on a point, have something up your sleeve they may want more.
Consider termination provisions. Even after you’ve signed the papers, you may learn information that causes you to want to get out of the whole deal. Make sure your non-negotiables are spelled out in the deal upfront.
Understanding Legal and Miscellaneous Requirements
When you purchase an existing business, it’s more than just understanding financials and terms. There are a host of legal considerations as well, and they aren’t the kind of thing you’ll want to forget about.
Licensing and Permits.. If the business you’re purchasing needs licenses or permits to operate, you’ll need to get those in your own name. They often come with additional fees and waiting periods, so you’ll want to be on top of those early to make sure the ownership transition is seamless.
State and Local Laws and Ordinances.. Your town or city can shut you down if you run afoul of any ordinances or local laws, so make sure you are up-to-speed on what they are and how they affect your business.
Environmental Regulations.. Depending on the industry you’re getting into, you may have environmental laws to comply with, especially if your business deals with hazardous or industrial materials.
Previous/Future Contracts.. If you’re involved in more than one acquisition at a time or have other existing contracts, you’ll need to find out how your new venture will affect them.
Letter of Intent.. Before you engage in any acquisition, you’ll need to write a letter of intent that announces your plan to explore an acquisition. You want to be able to sit down on good terms with the seller to work out the details, and this is the first step in doing that.