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Buying a Business

If you are not starting a business from scratch, one other way to become your own boss is to buy an existing business. The following brochure is intended to give you a brief overview of some important factors to consider before buying an existing business.

Purchasing an existing business can have advantages over starting from scratch.

Some of those advantages could include:

• And established customer base
• Established supplier network
• Cash flow is being generated
• Business methods are in place
• Inventory is on hand
• All or most equipment will probably come with the business
• Staff is hired and trained
• Former owner may be willing to give you free advice on how to run the business
• Goodwill already exists
• Business is known, therefore marketing does not start from ground zero

So all you have to do is walk in and start making money, right? Not so fast. As with everything else, there is a dark side. It is up to you to discover whether or not this is a good opportunity.

A fundamental place to start is to ask the question; why is the business for sale? Such vague assurances as “other business interests” should not be enough. Retirement can be, but unlikely if the person is relatively young. Is the business in some difficulty? Are the owners just worn out after only a few years of trying to keep a difficult or poor business operating by working too many hours? Is there more profit I selling the business than running the business?

These are some of the questions you should ask yourself before making the decision to purchase or not to purchase. 

Just as there are advantages to buying an existing business there are also some potential disadvantages:

• If the business has a bad reputation, it will become your business’s bad reputation
• Equipment may be outdated or useless
• Former owner may misrepresent the business and get higher price than what the business is worth
• It may have a poor location
• Contractual relationships of the business may be unfavourable and difficult to escape
• Poor employees may come with the business unless you fire them
• The industry or products offered by the business may be dying or obsolete

Business Brokers

There are organizations who offer can assist with the entire process of purchasing a business; they can assist with the financial and legal matters that occur when purchasing a business.

Business Evaluations

Valuating a business is not a simple task. The number you have in mind may differ from that of your family successors, potential buyers or tax assessors. It's probably best to call in a specialist who can look at your assets, liabilities and goodwill with clear-eyed detachment.

Different methods can be used to arrive at your business valuation, and they can be used alone or in combination.

Asset-based approach
This method totals up all investments made in the business to date. It does not account for the depreciation in the value of machinery that may be several years old, or other assets that have declined in value.

Business comparison
This approach determines a company’s market value by comparing it to similar companies in the field and transactions that have occurred in the recent past. For a highly specialized business, it may be difficult to research comparable transactions.

Company's past earnings
This method calculates a company’s value by its past earnings and profits. Those earnings and profits, however, are not a guarantee of future growth.

Doing it yourself
If you are intent on determining the market value of your company yourself, here are some pointers. First, determine just what it is that will be sold — or passed on — to your successor(s) or buyer(s).

Do you have significant physical assets, or are you selling goodwill and client lists? How valuable is that client list, and does it include quality clients? Can you charge a premium for your client list, business name or logo?

If you have equipment, how much equity do you have in it? If it's not leased, consider asking a machinery dealer for an appraisal.
How about receivables? What state are they in? What percent are at 60, 90 or more days?

Once the assets have been added up, look at your liabilities. These include all outstanding company debts, of course, as well as variables such as unresolved lawsuits.

Some industry groups publish business valuation data based on sales and net cash flow. This data can be used to estimate the value of your business. Research firms that are similar to your own to see how much they sold for. Your company, however, may be a model of efficiency and profitability that outstrips all the rest, so those numbers are not necessarily the best basis of valuation.

Getting professional help
Business valuation requires some legwork and a lot of research. Do you have the time, the proper tools and the inclination to do it? If not, you might consider using a business valuator, who may be an accountant or a lawyer and should be experienced enough to determine the best method or combination of methods for the task at hand.

(Source BDC)