Buy existing business for fast start
I've just left my job of 25 years and plan on buying a business rather than starting from scratch to round out my working years. Any suggestions?
One of the fastest ways to get into business is to buy an ongoing operation. If you do that you don't have to be concerned with all of the challenges that come with getting a new business off the ground. And if the company has been in business five or more years, you can probably guesstimate some of the things that are likely to happen over the next few years and be prepared to deal with them.
On the other hand, there are challenges that you would not face if you started the business from scratch. One is how much you are going to pay for the company. And no matter what that is, you're probably going to look back and think you paid too much.
That's why you should do your homework before making any decision. Find out all you can about the business and this company's activities. Then use the information to come up with a price that is acceptable to the owner and you can live with. It's also a good idea to get help from a buy and sell consultant. If you pay too much the return on your investment will be less than you'd like or maybe could get on some other investment. Price negotiation can be time consuming and ends up being a judgment call.
However, there are some things that you can do to ensure that you know what you're getting into. Here are six questions that you should ask:
If you can get satisfactory answers to these questions, then it's all a matter of the right price. And in determine that price, it's important to remember that once you've arrived at what you think is a fair offer and it's accepted, don't look back and second guess yourself.
- Why is the business being sold? This question gets at the owner's motivation. Perhaps the individual wants to retire or put money into a different business?
On the other hand, he may think that the business has little potential left and just wants to get out. If that's the answer obviously you don't want to buy the business. At the same time the owner is unlikely to tell you this reason. That's why you need to continue your questioning process until you're satisfied that you learn his motivation.
- What has been the history of sales and profit, and is the business affected by seasonal variations?
You'll want to see operating statements, balance sheets, cash-flow statements and income tax statements for the past three years. The present owner need to show these to you to justify the asking price, and you need to see them to validate your proposed offer.
- What is the physical condition of the business? Will you need to put money into repairing things or buying new equipment? If so, you'll want to know this because it will influence what you pay.
- How many of the key personnel will be staying? If you need them to ensure that the operation runs smoothly, you'll need to know before you make an offer.
- What does the competition look like? If the firm has been slowly losing ground, you'll want to determine whether you can turn it around.
- Finally, is the owner going to sign a covenant not to compete? After all, you don't want him to open a store down the street and take all your customers.
You are now the new owner and you have far more important things to take care of.
Bill Bryan is a counselor with the Service Corps of Retired Executives. SCORE offers counseling, workshops and seminars on small business operations. You can reach Bryan through SCORE, 515 N Court St. 815-962-0122, for information and appointments.
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