Entrepreneurs often think that starting a business means creating a business from scratch, and while this may be emotionally satisfying, buying an existing business may get you where you want to go in less time.

The Advantages of Buying a Business

Perhaps the biggest advantage to buying an existing business is that you can lower your start-up costs and have firm numbers to show business revenues over time.

An existing business has data to back up the owner’s claims – data you can check, analyze, evaluate, and use as part of your new business strategy. You can bring in your own people to evaluate the business, the market, demographics, and location.

An existing business has a structure and a routine of crucial business operations. Order fulfillment may have been automated. You have a stable client base you can rely on for the first year or two to get your new business generating more cash.

Business Valuations

You may find a business you like, there’s a long lease in place, and the owner seems eager to sell. How much is that business worth to you? There are several ways to evaluate the business, determined by the circumstance of the purchase and sale:

Capitalized earnings is one way to evaluate a business. It determines the return on an investor’s capital that’s put into the business. This method is most appropriate when you buy a portion of a business with the current owner as your new partner. “Who earns what?” is one of the first questions to ask and answer.

Cash flow is another means to evaluate a business. It’s most commonly used when the business seeks an infusion of cash, with the adjusted cash flow being the yardstick that measures business value.

Before you purchase a business, hire a CPA to conduct an extensive audit of income and outgo. Why? You’ll uncover the debts incurred by the business. If it’s crunched for cash, you won’t have as many options to grow in the near future – at least until some of that debt is paid down. A qualified CPA will tell you what you can expect. The last thing you want is a big surprise you hadn’t counted on – the kind that can set a business back years, or destroy it altogether.

Before you make any decision on buying a business, make sure you have a plan in place for how you will finance the purchase. A business professional at Nevada State Bank can review the options available to you, including both conventional and SBA loans*.

Buying a Business? Get It in Writing!

When you buy a home, there’s a lot of paperwork involved. The same is true when buying a business. As you go through the purchase process, you’ll want all paperwork in good order – the kind of order a legal advisor and accountant can provide.

Expect a letter of intent describing the terms of your agreement, including price, terms of purchase, conditions related to the sale of the business, and other information.

You can expect to sign a confidentiality agreement to prevent insider business info from slipping into the wrong hands and undermining the deal. To close the deal, close your mouth. It’s nobody’s business but your own.

Ask to see the past five years of local, state and federal tax returns. Any well-run business will provide those, usually with a single telephone call. Use these figures to establish trend lines indicating a consistent pattern of growth.

Copies of licenses, certifications, and accreditations to conduct your new business. If you buy, make sure all documentation is transferable to you as the new owner.

The best thing you can do is hire a business attorney to help with the purchase of an existing business. An alternative is a business broker.

There are other documents and features to check: the company website, client reviews, local suppliers, a talented labor pool – buying a business may be right for you, but the purchase of a business also comes with its own set of headaches.

Making the Transition

Once the deal has been finalized, you might want to start right out streamlining processes within the business and putting your personal mark on it. However, making a change at this point can be very risky, even if you think you can do it better another way. The company’s client base is used to doing things one way, and if you come in and change everything, long-time customers might not be happy. The same applies to long-time employees, who may be resistant to change until you’re able to prove yourself as a knowledgeable boss.

You may be able to convince the current owner to stay on board for a few months to show you the intricacies and the “small stuff” you need to know. He or she may be able to provide valuable information that isn’t available anywhere else.

Do Your Homework

Don’t rush into a business purchase without having all the information you need, or without consulting with experts who can provide impartial advice. It’s time to start your due diligence to make sure the decision you reach is the best one for you.

 

*All loans subject to credit approval. Restrictions apply.


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.