Thinking about starting a new business? You might be better off buying an existing business instead.
Purchasing an existing business eliminates some of the time and hassle involved with obtaining licenses and permits, meeting zoning requirements, negotiating a lease for space, launching a website and all the other tasks associated with a startup. And since you have customers at your door ready to spend money on products and services, cash is already flowing.
Keep in mind, too, that by buying an existing business, you’ve eliminated what potentially could be one of your competitors in the marketplace.
There are disadvantages to buying an existing business versus starting your own, of course, so you still have to do your due diligence.
If you do decide to purchase a business instead of starting your own, begin by checking online and working with a real estate broker who specializes in listing and selling businesses. There are lots of businesses out there that are available for sale that aren’t advertised in traditional ways, so you might not even be aware of them. Evaluate how available businesses match your knowledge, skills and prior work and life experiences.
Contact an attorney who actively deals in business sales because there’s no “standard” contract for buying a business. Visit with your accountant as well and keep him or her in the loop when it comes time to analyze the numbers. While it might seem like a daunting task to find a suitable business at a reasonable price, working with the right professionals makes all the difference in finding the right fit.
Once you’ve found that diamond in the rough, consider different methods for valuing that business to make sure the price is right. Since there are many types of businesses, there are also many ways to put a value on those businesses.
If the business has been around for a long time, use a capitalized earning approach to determine what an investor might expect in terms of a return on investment. A review of the last several year’s tax returns will reveal what you can expect in terms of annual earnings. Then break it down into monthly figures to determine if cash flows evenly throughout the year or if it’s more of a seasonal operation. If the books show little or no profit, value the business based on tangible and intangible assets.
Sign a confidentiality agreement in which you agree not to use any of the information provided by the seller of the business for any purpose other than to evaluate their business to make a purchase.
Now it’s time to get ready to make an offer. Have your real estate broker or attorney write a letter of intent to get the ball rolling. The letter offers an outline of the general terms and conditions of your offer, all or most of which will be included in the final purchase agreement to be drafted by the attorney closing the sale.
The final purchase agreement should include the sales price, method of payment, any required documents for the type of entity, security agreements and financing statements, lease assumption, franchise transfer (if a franchise), transfer of ownership for the tangible assets, covenant not to compete, employment agreements and seller’s agreement to provide training. There is also IRS Form 8594, an asset acquisition statement that must be filled out.
While this list is far from complete, it should give you a general understanding as to what is involved and why it’s so important to work with competent professionals.
There are many great businesses available today that have good balance sheets and sell for $75,000 or less to more than $1 million. Buy yourself a job and a great investment in a future in which you’re in charge.