Buying a Small Business?

Whether you will be buying a small business or building a business, is often the major decision to make before starting out on your future as a self employed entrepreneur.

Both choices have pro’s and con’s and need careful thought before you decide which way to go.

Here are some suggestions for you on buying a small business

What to buy

It is not easy taking on the purchase of an existing business but, if you follow good advice, it can be done and you will be in business a lot quicker than starting your own business from scratch.

Here let’s look at the buying of a ready made and operating business.

This can be done by purchasing a conventional business (production or service); buying a franchise or a ready packaged business (business opportunity).

These three types of businesses have different requirements; here we will assume that you have decided on a conventional business.

Buying a small business

Buying an existing business can often be easier and less risky than starting from nothing and can have advantages.

Usually you don’t have to look for customers, hire employees, market, or worry about cash flow and profits.

Even if the business is run down, at least the potential can be there for growth; if the business is not being run properly you can still turn it around.

Buying can be more expensive however than starting a business but raising cash on an existing business can be easier, so the choice is yours.

Here we will discuss buying a small business.

Things to decide before buying

• Be sure that the business you are looking to buy is right for you. Elsewhere on this site you can find information that will help you in
choosing a business
• Decide on the size of business that you wish to run. If you want to own a small business with few employees don’t waste time looking at 500 employee businesses that are for sale!
• In which area would you like to do business?

Buying a small business that is 3 hours travel time away from your home is not the thing to do, unless you intend to move nearer to the business.

Now start looking.

Now start looking for a likely business. This you can do by checking the newspapers, spreading the word to all your friends and acquaintances, advertising, or contacting business brokers. A broker however will cost you 5% – 10% of the price you finally pay for your business. This cost can however be worthwhile in certain cases. More on business brokers elsewhere.

Finding a business to buy takes time and sometimes much searching, but sooner or later, you will find something you like.

From now on you need to do all the right things to ensure that the business is really checked out and is the one for you. Here’s how.

From experience I have found that one can easily be blinded to the shortfalls in a business that you really desire. This can be very costly, so beware and check it out before buying a small business by following these guidelines.

1. Find out why the business is for sale! There can be many reasons, some good for the buyer, others not, so find out!
• The business doing poorly, depending on the reason, can be good or bad for you. Why is it doing badly?
• The owner wants to retire. Normally such businesses will have been well run and are in good shape.
• Family reasons can cause a business owner to sell. These reasons might be a death in the family, a divorce, or a need to move to another location.
• The owner wants to sell to move onto another business. These businesses are usually a good buy from the point of them being well run prior to the sale.
• Health reasons might force the sale of a business. If the owner has been unwell for some time and allowed the business to run down, be careful that you check it out well before buying. However you might consequently get it cheap!

Other reasons will be given, but the point is to find out why the business is being sold. If the reason is valid, fine. If at all suspicious don’t buy.

2. Does the business produce or give a service that is in demand and is likely to retain its demand?

Buying a small business that is producing goods or services that are no longer popular is not good.

3. Has the business got a good customer base or is it reliant on one or two customers? The greater its market share and spread of customers the better.
4. The company has a good reputation doesn’t it?If the company is known for poor quality and poor service, be very wary of buying. You could turn it around, but check out your potential customers before buying.
5. Are the business’s raw material sources or general suppliers reliable and assured?The seller might be getting out because a vital supplier is moving or closing down.
6. Check before buying a small business for any complaints pending against it by contacting the Better Business Bureau.

Right, how are you doing? Lots to do and get right so let’s stop a moment and talk about the people you need help from in your search for the right business.

Two A’s and a B?

Accountant, attorney and banker, three people that you need sooner than later.

Being on good terms with your banker or potential banker makes good business sense, but having a good accountant and attorney are vital.

Modern business is a tangle of legal, permit and tax issues. It is possible you can wade through them yourself, but more seriously they should be left to your accountant and lawyer.

Selecting good people who can help you is vital, ‘how to recruit’ will be discussed elsewhere.

Use them to check all the following items with you:-

Checking the Financials

Now is time to check the business financials and all the present trading returns.

• Financial Statements

Ask for and get the company’s financial statements for, at least, the last 3 years. These need to be final statements that have been reviewed and authorized by the company accountant.

Together with these also review the tax returns for the same period of 3 years.

Your accountant is important here, so get his opinion.

Remember that financial statements can be prepared for the tax people and bear little resemblance to fact. Don’t believe everything you read and don’t pay for unproved income!

A wink and a nudge is not good enough to prove the seller's claims of vast off book profits!

• Assets or Business, which to buy?

In many ways, it is advisable to try and buy the assets of a business and not buy a small business itself. WHY?

When buying a small business, if you buy the assets only, from the tax point of view, your tax base will be at the cost of the purchase and not the original cost to the seller. This can amount to a substantial sum.

Another good reason not to buy the business is that if money is owed by the business you will not be liable for any of it, if you have purchased only the assets.

The disadvantages of trying to buy the assets only are that it can be expensive, if the owner wants to sell his liabilities as well as the assets.

Play this one carefully to ensure that you get the best deal

I had some bitter experience of this when I bought the assets of a business and registered a new company to handle them. Good business practice, but unknown to me the new company name I had chosen had at some previous time been allocated to another business that had gone into liquidation.

As soon as I was up and running with my new name, some previous suppliers to the original company thought that the company that owed them money was back in business and here was their chance to get their money back.

The next thing I knew was when a collection agent was on the door step with a summons. I was quick to point out that my company had only been registered 4 months previously and so it was impossible to have owned monies from 5 years previously. It took some sorting out but it was done eventually.

Another thing to do when buying a small business is to physically check that all the mechanical and electrical assets are in fact in working order.

Be careful and look both ways before buying.

• Inventory

It is often the case when buying a small business that you also have to buy all of its liabilities.One of these liabilities can be its slow or unsellable inventory. Check what inventory you are buying, if it is still salable but very slow moving inventory, try and get a reduction in price on these items before you settle on a selling price.

If there is redundant or obsolete raw materials don’t pay new prices!

• Accounts Receivable

Another thing to watch out for is the amount of money owed to the business you are buying.

You can either purchase the accounts receivable with the business or allow the seller to collect them for himself after you purchase.

I recommend looking carefully at receivables; they can be an asset or a drag on the business.

If they are going to be difficult to collect, they could become a real burden on the business, so let the seller have them.Otherwise keep them, as once collected you still have the customer, for future potential sales. I favor this way.

You will have to make up your own mind here regarding accounts receivable.

Employees

Before buying a small business, realize that the existing employees are vital to your future success. Initially they will know far more about the business than you do, so make sure that they are going to stay with you after you buy.

If you loose your key employees, your life could become an instant nightmare, so ensure that they will be prepared to work for a new employer, you, after you buy.

Meet them individually before buying and get them on your side.

Change over

In 99% of all cases, it will be essential that the previous owner of your new business remains on hand to help out for at least a few weeks and maybe even for months, depending on the business that you are buying.

Build a clause into your sale agreement to this effect.

You might have to pay the seller for the time spent with you, but it is well worth it to know that you have someone to call on when needed.

Use the seller to teach you the business, introduce you to the customers and suppliers and help with the many queries you will initially have.

Your lawyer, accountant and the agreement

Ask your attorney to check everything before buying a small business. Here are some of the things that need to be checked.

Due diligence checks
• Financial statements including balance sheets, income statement, tax returns, cash flow.
• Check the net income by looking at all the ratios.
• Check the working capital
• The legal status of the business, are their any lawsuits pending or disputes with labor?

Is the business clear and free of liens and other debts?

Check all contracts the business might have with suppliers and customers.

Check for any pending changes in zoning regulations, state or federal legislation.

• Draw up or review the final sales agreement.
• Get yourself cover in the final contract with an indemnity from the seller to guard against anything the seller ‘forgot’ to tell you, did or didn’t do.

Here is a Checklist that you can follow to ensure that you get answers to all the questions you need to ask the seller of a business.

Finally

You have done all the work, made all the checks and you are satisfied the business is right for you. One final thing to do before buying a small business - negotiate the price. A few things to remember here.

The price to pay

• Let the seller start by asking him the price. Don’t you offer a price - never - let him start the ball rolling!
• When you have agreed on a price then talk the means of payment.
• You could pay cash, a percentage in cash, usually between 25% and 50%, or finance the purchase.
• The finance can come from a lender such as a bank and in the form of a long term loan, or even from relatives who still love you!
• You could pay with a promissory note or a mortgage agreement.

Take advice and run all proposals by your attorney and accountant before buying a small business.

Well I think that is it, you now own your own business! From here on you are your own boss and the buck stops with you. Take your future, run with it and you are sure to succeed. Buying a small business can be fun and profitable.

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