Buying a Business

While starting a business from scratch sounds exciting, it’srisky because it’s the most difficult way to get into business. Abetter option for many entrepreneurs is to buy an establishedbusiness. Buying a going concern shortens the learning curve,reduces the costs of “on-the-job training” and helps you avoid manyof the errors you might make in developing your business from theground 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 areason. And it’s up to you to discover what that reason is, whetherit’s financial or personal. Do your homework and investigatethoroughly before you even consider investing. The areas anddocuments you want to make sure you investigate include:

• Inventory
• Furniture, fixtures, equipment, and buildingstatus
• 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 organizationalchart
• Occupational Safety and Health Administration(OSHA) requirements
• Insurance
• Product liability

Don’t be too anxious when you’re looking to buy a business. Takeyour time and recognize that businesses typically don’t sellovernight. And make sure to avoid these practices:

Buying on price. Buyers don’t take into account ROI. Ifyou’re going to invest $20,000 in a business that returns only athree-percent net, you’re better off putting your money in a CD ormunicipal bond.

Running out of cash. Some buyers use most of their cashfor the down payment on the business and don’t reserve enough forworking capital. This is folly of the worst kind, putting thebusiness’ future on the line. Cash is king and needs to be managedthoughtfully. As a rule of thumb, at least 10 percent of your cashshould be considered contingency funds and at least three-monthsworth of operating expenses should be set aside as workingcapital.

Buying all the receivables. It generally makes good senseto 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 thereceivables–what’s not collected can be charged back against thepurchase price of the business. Receivables beyond 90 days belongto the seller for collection.

Failure to verify all data. Most business buyers acceptall the information the seller gives them without doing duediligence (preferably by a CPA who can audit financial statements).Heavy payment schedules. During the first year or so, it makessense to have smaller payments, graduating to larger payments asthe business grows and becomes successful. This can easily benegotiated with a seller.

Buying a business is a complex and highly emotionaltransaction. To make the best decision and achieve the mostfavorable terms, be aware of your emotions at all times, as theyreveal why you’re passionate about a particular business. And don’tforget to bounce your thoughts and feelings off your attorney, CPA,and other advisors.