By Small Business Association (SBA)
For some entrepreneurs, buying an existing business represents less of a risk than starting a new business from scratch. While the opportunity may be less risky in some aspects, you must perform due diligence to ensure that you are fully aware of the terms of the purchase.
If you have decided to buy an existing business, you will want to be sure you are making the right choice in your new venture. Only you can determine the right business for your needs; however, the following topics can help guide you make the best decision.
The Steps to Starting
There are many different types of businesses to buy. Take these steps to narrow down the list of potential businesses you may want to purchase.
- Identify Your Interests: If you have absolutely no idea what business you want to invest in, first eliminate businesses that are of no interest to you.
- Consider Your Talents: Being honest about your skills and experience can help you eliminate unrealistic business ventures.
- List Conditions for Your Business: Consider if a business has a condition that is unfavorable to you, such as location and time commitment.
- Quantify Your Investment: Finding profitable businesses for sale at reasonable prices can be difficult. Ask yourself why this business is for sale in the first place.
Advantages to Choosing an Existing Business
There are many favorable aspects to buying an existing business such as drastic reduction in startup costs. You may be able to jump start your cash flow immediately because of existing inventory and receivables.
Disadvantages to Choosing an Existing Business
There are also some downsides to buying an existing business. Purchasing cost may be much higher than the cost of starting a new business because of the initial business concept, customer base, brand and other fundamental work that has already been done. Also, be aware of hidden problems associated with the business like debts the business is owed that you may not be able to collect.
Doing Due Diligence
As you become a business owner, there are items that need to be addressed before entering into any business agreements or transactions.
- Obtain all Licenses and Permits Most businesses need licenses and permits to operate. The type of license or permit you need depends on your industry and the state in which the business is located. Use SBA’s licenses and permits finder tool to get a listing of federal, state and local permits and licenses you will need to run your business.
- Zoning Requirements: Zoning requirements may affect the type of business that you are intending to operate in a particular area. Visit the Basic Zoning Laws for more information about zoning and to ensure your business is abiding by all laws in your area.
- Environmental Concerns: If you are acquiring real property along with the business, it is important to check the environmental regulations in the area. Visit EPA’s Small Business Gateway for more information.
Determining the Value of a Business
There are a number of different methods to determine a fair and equitable price for the sale of the business. Here are a few:
- Capitalized Earning Approach: This method refers to the return on the investment that is expected by an investor.
- Excess Earning Method: Similar to the capitalized earning method, except that it separates return on assets from other earnings.
- Cash Flow Method: This method is typically used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm's ability to service debt.
- Tangible Assets (Balance Sheet) Method: This method values the business by the tangible assets.
- Value of Specific Intangible Assets Method: This method compares buying a wanted intangible asset versus creating it.
To be continued – Research Your Business Purchase and Check List for Buying Existing Businesses (Part 2)