Buying an Existing Business - « back to Articles
For the would be business owner buying all or part of an established business may be an excellent way to acquire a business.
Buying a business rather than starting one offers two main advantages. First, the business has a known performance record, which makes a more accurate gauge to assist the prospective buyer to know how well the business is likely to do in the future. Second, depending on the quality of that record, it may be much less difficult to influence a lender or investor to assist you.
To asses the profitability of the existing venture you must have the previous financial records. This is the first step in finding out what you the buyer will be getting for your money.
Before you study the financial records, you should ask yourself and perhaps, the owner a few questions.
These questions may include:
Learn more about your prospective business by talking to neighboring business people, suppliers, customers, and the owner's bank manager.
- Why is the owner selling this business?
- Is the business based on trends and out of fashion in a few years?
- What is the owner going to do next, open a new/better location and be in competition with you?
- Has the owner done something to upset the customers, leaving you with no customers?
- Have suppliers abandon the products or service?
It's Your Money, what are your getting for it?
Study the financial records. Look closely at the operating costs, the lease, and the balance of receivables and payables. If there are any discrepancies, find out why. Confirm whether equipment and office machines are old and determine the appropriate replacement costs. Review the terms of the lease or the condition of the buildings. Find out how much the owner has invested in this business and over what period of time this investment was made.
The financial records will tell you what the sales volume is, or at the least the number of customers and state of the receivables. If you cannot access this information, immediately reconsider your decision to buy that business.
Ask for the audited financial statements, preferably for three years. Never buy a business without studying recent and past profit and loss statements. If the financial statements are outdated, demand more current ones.
Understand how the business works. Spend at least one full day on the owner's premises during business hours. As you are there note your answers to questions like:
Inquire whether the owner is willing to remain with the business for a few weeks to assist you in taking over the business. If so, you will have to be prepared to offer a nominal salary for this service.
- Does the business have a good image?
- Are the premises neat?
- Would you want to go there yourself?
In establishing a negotiating price, you will want to review the financial statements with an accountant. Your Management Consultant can assist you to prepare a forecast and cash flow statement for the first year and a further two or three year forecast. These documents will tell you what to expect from your business. They will help you decide whether the purchase is a sound financial decision.
The object of going into business for yourself is to be successful and that should mean more than simply maintaining the business at the same level of profitability as the previous owner. Look for ways that you the new owner can improve its performance.
You will have more space for learning by purchasing a business than you would if you started the business from the beginning. Move cautiously and you may be able to improve the business by spotting opportunities the previous owner missed by being too close and involved in the business.
Never buy a business just to satisfy your desire for independence, no matter how much you're attracted by the idea of being your own boss. Your decision to buy must be your first sound business decision and with careful, practical planning it will be.