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Why should I buy a business rather than start one from scratch?
There are many advantages to buying an existing business rather than trying to start from scratch, with one of the biggest factors being that an existing business has a track record. The failure rate in small business is largely in the start-up phase. It is estimated that 80% of new businesses fail in the first 5 years.
Buying an existing business significantly increases your chances of success and offers greater protection of your investment. The existing business has demonstrated there is a need for that product or service in a particular area.
Most of what you would be buying is the “goodwill” of the business or the customer/client database. Instead of not knowing when you will start making money from your start up business, when you purchase an existing business you should start taking money home immediately.
Also, a new business requires an extreme amount of initial time and investment to get it off the ground. Although you will need to work hard when buying an existing business, it should not have to be as time intensive.
Usually when you purchase a business rather than starting one, it is easier to get a bank loan because there is a track record of how the business has performed. Financial records are available along with other information. In addition, most sellers will stay and train a new owner and some will also supply financing. Finding someone who will teach you the intricacies of running a business and who is also willing to finance the sale can make all the difference.
What types of businesses should I look at purchasing?
The best businesses to look at purchasing should be in industries that you have experience of or an educational background in. Obviously, you want to consider only those businesses that you would feel comfortable owning and operating as “Pride of Ownership” is an important ingredient for success. Owning a business can be hard enough and so buying into an industry you have little or no knowledge of only adds to the pressure.
You should also consider only those businesses that you can afford with the cash you have available. Look in a price range that will allow you to have extra funds in case of a business emergency such as a failure of a key piece of equipment or noncollectable accounts.
In addition, the business you buy must be able to supply you with enough income to pay your bills. However, you should look at a business with an eye toward what you can do with it – how you can improve it and make it more productive and profitable. There is an old adage advising that you shouldn’t buy a business unless you feel you can do better than the present owner. Everyone has seen examples of a business that needs improvement to thrive, and a new owner comes in and does just that. Conversely, there are also cases where a new owner takes over a very successful business and not soon after it either closes or is sold. It all depends on you!
Do I need professional assistance to buy a business?
Buyers take different approaches to the types of professionals used and in what capacity. Some like to “do it on their own” without any professional assistance, whereas others rely on a team of experts to assist them.
A professional business broker can be helpful in many ways. They can provide you with a selection of different and, in many cases, unique businesses - including many that you would not be able to find on your own. Approximately 90 percent of those who buy businesses end up with something completely different from the business that they first inquired about. Business brokers can offer you a wide variety of businesses to look at and consider.
Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise you about trends, pricing and what is happening locally. Your business broker will handle all the details of the business sale and will do everything possible to guide you in the right direction, including, if necessary, consulting other professionals who may be able to assist you.
When you work with us as your business broker we will recommend that you use the assistance of an attorney to review such legal documents as purchase contracts, leases and the closing documents and other contracts. We also suggest that you use a CPA/accountant that specializes in financial due diligence to verify that the business is performing financially as the seller claims.
Depending on what your circumstances are you may also want to speak to a loan officer, business appraiser or a commercial building appraiser among others. The extent of guidance you choose is up to you as the buyer but remember, a few thousand dollars in professional help may prevent you from making a devastating financial move.
Do I need to use an attorney to buy a business?
It may be advisable to have an attorney review the legal documents. It is important, however, that the attorney you hire is familiar with the business buying process and has the time available to handle the paperwork on a timely basis. If the attorney does not have experience in handling business sales, you may be paying for the attorney’s education.
Most business brokers have lists of attorneys who are familiar with the business buying process. An experienced attorney can be of real assistance in making sure that all of the details are handled properly.
Business brokers are not qualified to give legal advice. However, keep in mind that many attorneys are not qualified to give business advice. Your attorney will be looking after your interests but you need to remember that the seller’s interests must also be considered. If the attorney goes too far in trying to protect your interests, the seller’s attorney will instruct his or her client not to proceed. The transaction must be fair for all parties.
Whether you choose to instruct an attorney or not, you have to make the final decision; that “leap of faith” between looking and actually being in business for yourself is a decision that only you can make!
What happens when I find a business I want to buy?
When you find a business, the business broker will be able to answer many of your questions immediately or will research them for you. Once you get your preliminary questions answered the typical next step is for the broker to prepare an offer based on the price and terms you feel are appropriate. This offer will generally be subject to your approval of the actual books and records supporting the figures that have been supplied to you. The main purpose of the offer is to see if the seller is willing to accept the price and terms put forward.
There isn’t much point in continuing if you and the seller can’t reach an agreement on price and terms. The offer is then presented to the seller who can approve it, reject it, or counter it with his or her own offer. You then have the decision of accepting the counter proposal from the seller or rejecting it and going on to consider other businesses.
If you and the seller agree on the price and terms, the next step is for you to do your “due diligence.” The burden is on you as the buyer, no one else. You may choose to bring in outside advisors or to do it on your own – the choice is yours, although we do always recommend that you use a CPA. Once you have checked and approved those areas of concern, the closing documents can be prepared and your purchase of the business can be successfully closed.
You will now join many others who, like you, have chosen to become self-employed!
How does it work if there is a lease involved?
If the business sale involves the lease of a property then in some cases the seller’s lease is assigned to the buyer with the landlord’s approval and sometimes the seller is released from the lease, with a new one being executed for the buyer at the time of closing. Our team of experts can help you assess the best course of action to take.
What will your services cost?
Business brokers are typically compensated the way that residential real estate agents are. The seller pays the listing agent and the listing agent pays the buyer’s agent, meaning our services come at no cost to the buyer.
Why would you not use a business broker if the services are free to you, the buyer?
Wouldn’t it be cheaper to start a business than purchase one?
Whilst the initial set up costs might be cheaper when starting a business rather than purchasing one, over the long haul purchasing an already established business could be more cost effective.
Starting a new business might require an infusion of cash on a regular basis until the business can support itself. This could take months or years. In fact, many new businesses never turn a profit and are forced to cease trading.
When purchasing an existing business, you should start making money immediately. Over a period of time purchasing a business can be much less expensive and provide a far greater return on your investment, not to mention a large reduction of risk to you as the business owner.
Should I buy a small business or should I buy a new start-up?
When buying a business there is historical data that shows the track record for statistics of businesses in detail. One business might be short-term, seasonal, long term, or depression free depending on current economic trends.
New start-ups build everything from scratch. Ideas can be new with no assurance for investment, no history of financials, or management. This is the hurdle where most start-ups lose their shine when compared to an established business that has proven financial statements to back their success.
All the current information for back-end requirements and front-end cash flow can be thoroughly examined on an existing business. Most sellers also give inside information for the smooth functioning of small businesses for the long term. Seasonal changes, customer viewpoint, services rendered etc. give you the right opportunity to select the perfect business for your choice. Finance supplied from third parties is also available for successful small businesses!
How are asking prices determined?
Generally, at the outset a prospective seller will ask their business broker what he or she thinks the business will sell for. The business broker usually explains that a review of the financial information will be necessary before a price, or a range of prices, can be suggested for the business.
Most sellers have some idea about what they feel their business should sell for and this is certainly taken into consideration. However, the business broker is familiar with market considerations and, by reviewing the financial records of the business, can make a recommendation of what he or she feels the market will dictate.
Using the financial information provided by the seller, a business broker will re-cast the financials to determine what a buyer would be making from the business if it continues to perform in the same manner as the seller states the business has operated.
This recasting includes the net profit of the business plus the following; owner’s salary (assuming a single buyer will work the business full-time), any loan payments the seller is paying (businesses are usually sold free and clear with the seller paying off any loans the business may have at the time of closing), depreciation, amortization expense, any non-essential business expenses, and any benefits the company is paying on behalf of a seller such as health insurance.
The above recasting of the financials results with what’s called an “adjusted net”. Using rules of thumb in combination with sales history of similar-like businesses a business broker will provide a “fair market valuation” based on the adjusted net and/or gross sales of the business.
The fair market valuation that a business broker provides to a seller may or may not be the asking price the seller decides to list the business at. In the end, the final price will be determined by how much the seller is willing to sell for and how much a buyer is willing to pay. This is called an “arm’s length transaction”, which is a transaction in which the buyers and sellers of a product will act independently and have no relationship to each other. The concept of an “arm's length transaction" is to ensure that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party.
Since a high number of business sales are seller-financed, the down payment and terms of the sale are very important. In many cases, how the sale of the business is structured is more important than the actual selling price of the business. Too many buyers make the mistake of being overly-concerned about the full price when the terms of the sale can make the difference between success and failure.
What can business brokers do, and what can they not do?
Business brokers can help you identify businesses for sale that best suit your experience, skills, and talents. We can present businesses for sale that meet your criteria, help in the negotiation of the contract, help secure financing, guide the transaction to closing, and help ensure an easier transition of the business. As business brokers, we perform many activities to help you successfully acquire a business.
Please note however that we are neither attorneys nor accountants and therefore cannot provide you with legal or financial advice.
I have been searching for a business to buy – why are brokers/sellers not getting back to me?
A study of various statistics show that over 95% of buyers that inquire about buying a business never end up making a purchase. As a result, many brokers take a long time to respond to a buyer or in some cases may not reply at all.
We take pride in the fact that we respond quickly to all buyer inquiries. If you decide that the particular business you were interested does not meet your needs, we can help you create a “buyer package” so that you will be considered a “serious” buyer by other brokerage firms that you may approach in the future.
Most of the time just the fact that we are calling the other brokerage company on your behalf will result in you being considered a serious buyer by the other company. Many times, we can get more information and get it quicker than you could if you tried calling the other company on your own.
Remember, it does not cost you anything to use our services. In fact, we can save you time and money.
What forms of financing are available?
A number of business sales are seller-financed, and in these instances the down payment and terms of the sale are very important and can often make the difference between whether a business sells or not.
There are also several other financing options available to buyers, including conventional and Small Business Administration loans. We work with you to explore the various options and help you to obtain financing if you qualify.
What typically gets transferred in the sale and what does not?
Typically the asking price of the sale of a business includes all the furniture, fixtures, equipment, inventory, and goodwill. All loans are paid off at the time of closing so that the assets are conveyed to the buyer free and clear.
Any money in bank accounts, deposits, and the accounts payable are usually not included in the asking price. Accounts receivables are usually not included, although in some circumstances this might be necessary.
What is the real reason people go into business for themselves?
There have been many surveys taken in an attempt to answer this question. Most reveal the same responses and in almost the same identical order of priority. Here are the results of a typical survey, listed in order of importance:
To do my own thing, control my own destiny.
I don’t want to work for someone else.
To better utilize my skills and abilities.
To make money.
*It is interesting to note that money is not at the top of the list, but comes in fourth.
What does it take to be a successful business owner?
Firstly, you need adequate capital to buy the business and to make the improvements you want along with maintaining some reserves in case things start off slowly, or something unexpected happens.
You need to be willing to work hard and, in many cases, to put in long hours. Unfortunately, many of today’s buyers are not willing to do what it takes to be successful in owning a business. A business owner has to, as they say, be the janitor, errand boy, employee, bookkeeper and “chief bottle washer”! Too many people think they can buy a business and then just sit behind a desk and work on their business plans. Owners of small businesses must be “doers.”
If you have any questions that are not covered in this section then call us on 407-908-4663 or email us at firstname.lastname@example.org and we would be more than happy to help.
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