Buying a Business 6

For some people, buying an existing business is a better option than starting from scratch. Why? Because someone else has done much of the legwork for you, such as establishing a customer base, hiring employees and negotiating a lease. But if you want to buy a business, you’ll need to do some thorough research to make sure that what you see is what you’re going to get.

What type of business should you buy?
The kind of business you should buy depends on the types of work you’ve done in your life, classes you’ve taken or perhaps special skills you’ve developed through a hobby. It’s almost always a mistake to buy a business you know little about, no matter how good it looks. Not only will you have to struggle up a big learning curve after you buy it, but you might not know enough about the industry to determine whether a particular company is a good value.

In addition to buying a business in an industry that you know, try to choose one that you love. It’s less difficult — and a lot more fun — to succeed in business when you enjoy the work you’re doing. To learn more about choosing the right type of business for you, read Starting the Right Business.

Finding the right business
After you’ve decided what type of business you want to buy, you’re ready to begin your hunt for the perfect company. Consider starting your search close to home. For instance, if you’re currently employed by a small business you like, find out about the present owner’s circumstances and whether she would consider selling the company. Or, ask business associates and friends for leads on similar businesses that may be on the market; many of the best business opportunities surface by word of mouth — and are snapped up before their owners ever list them for sale.

Other avenues to explore include newspaper ads, trade associations, real estate brokers and business suppliers. Finally, there are business brokers — people who earn a commission from business owners who need help finding buyers. It’s fine to use a broker to help locate a business opportunity, but it’s foolish to rely on a broker — who doesn’t make a commission unless he makes a sale — for advice about the quality of a business or the fairness of its selling price.

Research the business’ history and finances
Before you seriously consider buying a particular business, find out as much as you can about it: thoroughly review copies of the business’ certified financial records, including cash flow statements, balance sheets and accounts payable and receivable, employee files, including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information.

This review (lawyers call it doing “due diligence”) will tell you a lot about the company you’re buying and will alert you to any potential problems. For instance, if a major contract doesn’t allow the current owner to assign it to you without the other party’s permission, you should enlist the owner to help you obtain the other party’s consent.

Don’t be shy about asking for information about the business. Here are some other details you should determine before you commit yourself to buying a particular business:

  • who holds title to company assets
  • whether there is any potential or ongoing litigation
  • whether there have been any workers’ compensation claims or unemployment claims made by company employees
  • whether the company has consistently paid its taxes, and any potential tax liabilities
  • whether any commercial leases and major contracts can be assigned to the new owner
  • whether the company has given any warranties and guarantees to its customers
  • whether the company owns trade secrets, and how it protects them
  • whether the company owns patents and copyrights
  • whether the company holds registered trademarks
  • whether business licenses or tax registration certificates are transferable
  • whether the business is in compliance with local zoning laws
  • whether there are any toxic waste or environmental problems, and
  • if the business is a franchise, what it will take to get the necessary franchisor approval.

This isn’t an exhaustive list; you should review any business records that will provide you with information to help you decide whether the business is a smart purchase. If the seller refuses to supply any of this information, or if you find any misinformation, this may be a sign that you should look elsewhere for the right business to buy.

Closing the deal
If you’ve thoroughly investigated a company and wish to go ahead with a purchase, there are a few more steps you’ll have to take. First, you and the owner will have to agree on a fair purchase price. A good way to do this is to hire an experienced appraiser who can estimate the company’s fair market value.

If all goes well, you and the business owner will agree on a fair price as well as other aspects of the purchase, such as which assets you will buy and the terms of payment — most often, businesses are purchased on an installment plan with a sizable down payment.

After you have outlined the terms on which you and the seller agree, you’ll need to create a written sales agreement and possibly have a lawyer review it before you sign on the dotted line. One good resource is Buying a Business: Legal & Practical Steps, by Attorney Fred S. Steingold (Nolo.com), which contains a fill-in-the-blank sales agreement.

About the Author Nolo's mission is to make the legal system work for everyone -- not just lawyers. What we do: To help people handle their own everyday legal matters -- or learn enough about them to make working with a lawyer a more satisfying experience -- we publish reliable, plain-English books, software, forms and this website. Some… Read more »

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  • Mike Kohen

    Great article! A great resource for buying a business is buybusinesses.com

  • http://us.businessesforsale.com/ Shaun

    This article addresses two main points, the stages of buying a business and also the things to consider when buying into a business. I think this is a must read for anyone considering to buy a business, as there are many things to think about and this article is one of the best in terms of looking out for the buyer.

    I do agree strongly with making sure that the business you are choosing is right for you, as it is a vital part of making the business a success. It is also very important to gather as much research on the businesses you are interested as possible, as this can change your outlook on certain businesses in terms of the best business to buy.

  • http://www.buyinga-business.com Christine Sutherland

    I would like to add a few factors from the 6 Steps of Due Diligence:

    Check that the product or service offered is sufficiently different (product differentiation) from other similar items on the market so that you’re not struggling to win or maintain market share. (Note “high quality” is not product differentiation; it’s a given.)

    Check that there is a strong and sustainable market for the product or services, including impact of technology.

    Check that the price is cost competitive with the nearest similar product or service.

    There are more aspects to due diligence than this, but by checking through the 6 Steps of Due Diligence yourself, you can save a lot of time, energy, and money. Use this process to exclude poor options from your list.

  • http://www.businessforsale.com.au Bach Ly

    I agree on “Starting the right business” – Choose the business type that you love or at least are willing to learn about. But the hard thing, how to find a business that I would love? There are thousands of categories out there, which one would suit me?

    I read the article “Starting the right business” with the two examples of a contractor and a gardener. But imagine, if have not got a chance to work in a particular industry for so long that I know something about it, or I have kept changing jobs, then I end up being still not sure what exactly what I would love to do.

    Any recommendation?

  • Chantal Renouf

    Bach,
    If you are passionate about something you will succeed with it. If you are completely unsure about a business to purchase then try to find something that has the potential to branch to keep you interested and motivated. I think you will find that the first few years of owning your business will be a rewarding experience as you can create your own goals and targets and strive to achieve. If you continute to make new goals say every 3 – 6 months (given the current status of the business) for example target a different area each period you will constantly be motivated to excel in each area.
    Like you I do find it hard to maintain concentration, commitment and motivation once the thrill has gone of a new job or area of employment. I have stuck by my goals for the last few years and I have only increased both my personal and business skills. I have found it rewarding.

    As for the article it has also helped me when making decisions about the purchase of a business. I would not take these words lightly!

  • http://www.business-trader.com.au Buying a Business

    Too many times I am reading stories about how someone rushed into the financial commitment of a new business venture, only to have lost their money or interest. This article highlights some crucial points to remember bore starting or buying and already established business.

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