If you’re considering buying an existing business, here is a simple yet detailed guide for you:
Pros and Cons of buying an existing business:
Cons – Usually existing business is priced higher, not just because of the existing assets, but also because of its established relationships with suppliers and customers, making it constantly earn profits. You must also be skeptical enough if the business has outstanding debts before making the decision. You might also have a hard time dealing with the existing employees, most of which are people you don’t really know and who might be resistant to the changes that you plan to do with the business once you take over.
Pros – As they say, buying an existing business is less risky because you of its proven track record. It can already present actual profit and loss statements rather than estimates. It has already established its name in the market and the pricing of its products and services have already been accepted by the customers.
Why do owners sell their businesses?
The most common reasons why people put their businesses on sale are retirement, urge to have a new lifestyle, or the willingness to pursue a brand new idea. Some people might be getting bored with the same routine of the existing business and want something new. But be mindful of this; some businesses might be on sale because of the downward trend of its performance. You might suffer the consequences if you decide to purchase a business with a low potential
How to determine the type of business to buy
Usually, buyers consider the ff. factors when buying a business:
Location – If you’re living in BC, it’s highly advisable to purchase a business within your area to avoid incurring more costs and for you to be able to monitor it closely.
Size – If you’re still a first-timer, it’s recommended to buy something that’s easy to monitor, in terms of its size. But if you think you have the skills to manage multiple processes and products/services, then by all means, go for something bigger.
Industry – You have to choose a business that belongs to the industry that you are familiar with. It will be much easier for you to run the business if you already have the experience and skillset needed to keep it growing.
Your lifestyle – Do you plan to own a business while still having a day job? Do you have other errands to attend to while managing the business? These are some of the things that you also have to consider when buying a business.
How to look for businesses on sale
Word of mouth – Try engaging in conversation with the customers and owners of the type of business you are targeting. You may also want to speak with suppliers and other business professionals to let them know your interest of buying a business.
Online – There are a lot of online marketplaces where you can search for businesses on sale, one of which is Business for Sale in BC (If you’re looking for a business situated in the BC area, this is the best website to visit.)
Business broker – Hire a professional who can help you select and assess a business based on several factors and also in negotiating the desired value (based on research and evaluation), and closing the deal. Note though that brokers usually charge 5-10% commission.
Buyers are given some time to evaluate the business that they are eyeing. Here are the important questions that need to be answered during due diligence:
- Is the business earning profits?
- Are all the taxes being regularly paid?
- Are the books and records of the business updated and accurate?
- Does the business have a good mix of customers? Or does its sales depend highly on one type of market?
You have to also scrutinize the potential liabilities that the business might have:
- Any lawsuits
- Investigations conducted by the government
- Dispute with the landlord
- Failure to obtain license or permit for the business
Make sure to also do an independent valuation of the business with the help of an accountant. This will help you come up with a favorable price that you will be paying for the business.
If you do not have enough resources to make the purchase, you might want to consider these methods:
- Seller financing – You come to an agreement with the seller that you will make regular, staggered payments with interest within a period of time.
- Bank loan – Banks usually prefer financing existing business because of its less risks than a start-up business.
- Angel investor – Talk to a friend or a relative that can help you fund a part of the cost of the business.
Close the Sale
Apart from making the payment itself, you also have to make sure that these documents will be prepared as proof of the sale:
- Letter of intent
- Confidentiality and non-compete agreements
- Contracts and leases – This should contain the sale price, date of sale, and the agreed payment terms. You need to seek the help of a lawyer in drafting the contract.
- Financial statements and tax returns dated 3-5 years
- Sales agreement for the existing assets