When going into business for yourself, you may opt to actually buy an existing company. According to the latest numbers, more than half a million businesses annually change hands. And given the number of retirees forecasted—this number will only go up. Rather than start from scratch, purchasing an already working company might be a smart move for you. That does not, however, mean there won't be plenty of work involved still. In this article, we'd like to look at both the up and the downsides of purchasing an existing business, and hopefully, give you greater insight into what you could be facing.
The Benefits of an Existing Business
Perhaps the greatest benefit is that you will be taking on a company that is in fact established and as such has profits coming in. And while you will have to spend money (potentially a lot of money/) to purchase the said company, keep in mind, their cash flow picture could look pretty good.
Beyond the financial stability that you will potentially have with an existing business, you also have a customer base in place as well as an established reputation. This is huge actually. With a brand new endeavor, making a name for yourself and drawing in a consistent client base can be one of the most difficult initial hurdles to overcome.
Not just customers either, but you very well could have employees on board who are familiar with the day-to-day of the business and who in essence can help guide you in this opening phase.
Depending on the nature of the company, you may also gain access to key copyrights and patents which in and of themselves could be worth the price of acquiring the company.
The Drawbacks of an Existing Business
Usually, when purchasing a business especially a profitable one, the upfront costs are quite high. Whereas in starting your own new company, the money required at least at the outset may be significantly lower. Especially if there's intellectual property involved, the price for the business could be at a premium.
Also, keep in mind that you are new to the endeavor and as such, you will need time to get caught up and learn the ropes—you can't expect to just jump right in on day one and understand all you need to know.
There are going to be some risks involved. Just because it's an established business does not guarantee that it is risk-free—you want to be aware of this and keep your eyes open as you familiarize yourself with procedures and processes.
What it Takes to Buy a Business
If in fact, you've decided that acquiring an existing business is the route you prefer, then below is a quick guide to help you more comprehensively understand what it takes to go out and actually purchase a company.
First off, as yourself why you want to buy said business? What is your background? How is your experience relevant? Not saying that it has to be, but it certainly helps. Furthermore, do you have a passion for the industry? What's the saying…love what you do and you'll never work a day in your life. Why purchase a business if it's not something about which you're enthusiastic?
On a more practical level, consider such things as location: If for instance, it's a three-hour ride from your home, how feasible will this be? Not to mention, is it in a decent location where prospective clients can find it?
Also, what's the size of the company? Are you prepared to take on a big operation—or does it make more sense for you to start smaller?
Have you looked into the potential successfulness or lack thereof of the business in question? Obviously, any business you buy, you want it to make a profit. Look at current numbers and then map these onto what you know you're going to have to spend to acquire the company. In other words, consider profitability from all angles.
As the business is for sale in the first place—ask yourself why? It could be something as simple as the owner is nearing retirement and wants to enjoy his golden years. If this is the case, then great. But you want to make sure that there aren't underlying factors which could ultimately jeopardize the longevity of the organization.
For instance, what are current business debts like? Is competition just getting increasingly stiff? Has their reputation somehow taken a hit? Is the location not sufficient? Do your homework, find out everything and anything you can behind the reason for any proposed sale.
The process of gathering information in anticipation of any sale is known as due diligence. You absolutely want to make sure and do yours. You may need to enlist legal and/or some other form of professional help to track down all records and reports that required in order to make an informed decision.
Once You've Agreed on a Price…
After having come to an agreement, there will be a series of documents that you will need from the seller in order to make the transaction a smooth one. These will include:
Letter of Intent: This simply states that the seller does, in fact, intend to go through with the transaction. It should include the proposed price as well as a listing of business assets and liabilities.
License and Permits: This will depend on the nature of the business. You do want to make sure that the company is in compliance with local, state and federal licensing regulations and is up to date on any permits, etc.
Certificate of Good Standing: This basically shows that the company has registered the appropriate documentation at the state level for its LLC status and is currently up to date.
Environmental Regulations: Are they in compliance with any relevant EPA rules and regulations?
Business Financials: You are going to want an experienced accountant to take a look at all financials involved with the business. Everything from tax returns to balance sheets, to accounts payable.
The Bottom Line…
The process can be long and somewhat tedious at times. Doing your due diligence is key here to the successful transition from one owner to another. However, hopefully, throughout the process, you will start to feel more comfortable with the infrastructure of the company.
When purchasing any company, you will most likely need working capital to get started. Obviously, you want to hit the ground running. First Union has a variety of lines of credit and short term loans specifically designed for those who've just purchased a business and need money to implement their plans and ideas while keeping operations running smoothly. Don't hesitate to call and let us know about your new venture— we can't wait to help!