Tips on Buying a Business
In many cases, it is safer and more profitable to buy an existing business than starting from scratch. An existing business usually provides an established market, trained employees and proven profits. Another reason to buy an existing business is the drastic reduction in start-up costs of time and money.
While the initial purchasing cost can be substantial, the ongoing business enterprise can provide immediate cash flow due to existing inventory, work in progress or receivables. Customer goodwill should be present assuming the business has a positive track record. Obtaining sound professional assistance, from an accountant, an attorney or your local Small Business Development Center (SBDC), can be helpful in identifying pitfalls to be avoided when buying a business.
One of the first steps in the acquisition process is determining valuation of the business. A professional valuation of the business can help establish the sales price upon which both buyer and seller agree. Past financial reports including Profit and Loss, Balance Sheet and tax returns are invaluable in determining the business' value. Another important aspect of the valuation issue is projecting the business' cash flow and assembling assumptions that are grounded in logical market analysis.
It's important for the buyer to perform due diligence as part of his business research prior to offering the seller money or formalizing a letter of intent. The letter of intent sets out the basic terms of the acquisition which may include price, payment methods and stock or asset purchase options. Here again, professionals, such as accountants, attorneys or business brokers can be helpful.
As the purchaser of a business, you may be held responsible for the previous owner's liabilities, regardless of any contractual language to the contrary. The buyer should also make sure that the seller of the business provides proof that there are no hidden liabilities.
After an agreed-upon valuation, letter of intent and determination of future viability, both parties should try to construct the acquisition in a way that equitably benefits both buyer and seller. Tax benefits can accrue to one or both parties depending on how the parties fine tune the sales agreement.