Definition: An alternative to starting a business from scratch or buying a
business opportunity that involves purchasing an existing business
for sale
While starting a business from scratch sounds exciting, it's
risky because it's the most difficult way to get into business. A
better option for many entrepreneurs is to buy an established
business. Buying a going concern shortens the learning curve,
reduces the costs of "on-the-job training" and helps you avoid many
of the errors you might make in developing your business from the
ground up. In an already existing business, everything is in place,
from customers to a credit line at the bank.
Keep in mind that all businesses for sale are for sale for a
reason. And it's up to you to discover what that reason is, whether
it's financial or personal. Do your homework and investigate
thoroughly before you even consider investing. The areas and
documents you want to make sure you investigate include:
- Inventory
- Furniture, fixtures, equipment, and building
status
- All contracts and legal documents
- Incorporation paperwork
- Tax returns
- Financial statements
- Sales records
- Complete list of liabilities
- Accounts receivable
- Accounts payable
- Debt disclosure
- Merchandise returns
- Customer patterns
- Marketing strategies
- Advertising costs
- Prices
- Industry and market history
- Location and market area
- The business's reputation
- Seller-customer ties
- Salaries
- List of current employees and an organizational
chart
- Occupational Safety and Health Administration
(OSHA) requirements
- Insurance
- Product liability
Don't be too anxious when you're looking to buy a business. Take
your time and recognize that businesses typically don't sell
overnight. And make sure to avoid these practices:
Buying on price. Buyers don't take into account ROI. If
you're going to invest $20,000 in a business that returns only a
three-percent net, you're better off putting your money in a CD or
municipal bond.
Running out of cash. Some buyers use most of their cash
for the down payment on the business and don't reserve enough for
working capital. This is folly of the worst kind, putting the
business' future on the line. Cash is king and needs to be managed
thoughtfully. As a rule of thumb, at least 10 percent of your cash
should be considered contingency funds and at least three-months
worth of operating expenses should be set aside as working
capital.
Buying all the receivables. It generally makes good sense
to buy the receivables, except when they're 90 days old or older.
The older the account, the more difficult it will be to collect.
You can protect yourself by having the seller warrant the
receivables--what's not collected can be charged back against the
purchase price of the business. Receivables beyond 90 days belong
to the seller for collection.
Failure to verify all data. Most business buyers accept
all the information the seller gives them without doing due
diligence (preferably by a CPA who can audit financial statements).
Heavy payment schedules. During the first year or so, it makes
sense to have smaller payments, graduating to larger payments as
the business grows and becomes successful. This can easily be
negotiated with a seller.
Buying a business is a complex and highly emotional
transaction. To make the best decision and achieve the most
favorable terms, be aware of your emotions at all times, as they
reveal why you're passionate about a particular business. And don't
forget to bounce your thoughts and feelings off your attorney, CPA,
and other advisors.