Buying Small Businesses
Advice on How to Buy Small Business
Buying an existing business is considered a safer venture than starting a new one. But how would you know that you are getting the best for what you are paying out?
Learn the basics of buying a small business and get the confidence you need to finally choose a venture to invest on.
Advantages and Disadvantages of Buying a Small Business
It is considered more safe to buy an existing business than to start one. Startups could pit you against the tasks of coming up with a business plan and dealing with investors and legal issues -- matters that could be complicated sometimes. If you assume the operation of an existing business, you won't have to worry about equipment and inventory, choosing a location, hiring employees, and establishing a customer base. You could also inherit a few more years of lease, some good employees, and loyal customers. Most importantly, you would have a pre-view as to how much you will earn by looking at the business' books, records and tax returns. Further, you significantly reduce startup costs of time, money and energy. And you don't have to wait long for cash to flow immediately because of the business' existing inventory and receivables. But for all these, you have to pay out, outright a bigger amount of money than you would have if you start a business and slowly build it. You also may have to inherit hidden problems associated with the business, and possible uncollectible receivables.
Tips in Buying a Small Business
So dig deeper when buying an existing business. Investigate about the reputation of the business by visiting the library, the local newspapers, or the Internet. Read news about it, if there are, going back at last five years. You can also ask the locals, including law enforcement people. Avoid those businesses with negative publicity and those that received frequent complaints.
Also, you don't only look at its track record, more importantly, because it will be you who will be carrying the business, you should also evaluate the current and the possible business landscape in the area you will be operating. Check whether business is booming or dwindling in the area. Is the profile of the population changing? Are there proposed changes in the law that would affect how you will be doing business?
In the books, look into how much the owner is earning after he pays his suppliers, employees, leaser, the water and electric systems and the IRS. Is the amount declining? Are you willing to get that much for your investment in buying the business? What about sales taxes? Make sure the seller has filed all state and local sales tax returns so that you don't inherit a business with state tax arrears. You could be dragged into the legal mess when the original owner can't be tracked down. If possible, get a "clearance certificate" from the state tax authority to free you for any sales taxes liability of your seller.
You also have to look around. Where is your nearest big competitor located? Are they planning to put up a location near you? Do your research.
How Much Should You Pay When Buying a Small Business
How much should you pay for the business will not only depend on the company's last year's financial statements. It should factor in analysis of several years of the business operation and future industry outlook, the economy, and how the company will compete. Many would say the basis will be the Fair Market Value, which is the value that prospective buyers and sellers would agree on given the right conditions, they are not under pressure to complete the transaction and have sufficient knowledge of the assets involved. There are other more specific methods and you could hire an accountant to assist you on making a decision.
Professional Help, Resources When Buying a Small Business
An accountant can help you do a proper evaluation of the financial condition of the business that you are planning to buy. Consultant can advise you on debts that you may possibly assume without risk. There are debts, obligations and liabilities that you will be advised not to take. You can hire a qualified attorney to help review the legal and organizational documents of the business you are planning to purchase. There are specific items that you should make sure you've checked out before closing a purchase. The Small Business Administration Web site has lists and other tips you could check out.
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