BUYING A BUSINESS - AN OVERVIEW
Acquisitions of existing businesses are at an all time high due to the immediate high returns and established business operations. Individuals, Corporations and Financial Buyer Groups are all actively scouring the countryside for existing businesses as a primary source of income and stability or to diversify their investment portfolios to balance the volatility of the stock market. It is usually much safer and more profitable to buy an existing business than starting a new venture. According to the Small Business Administration, over 50% of startup businesses fail due to unproven concepts, lack of working capital, and poor management.
Advantages To Acquiring An Existing Business
Some of the advantages in acquiring an existing business include:
Being able to review a company's existing track record as reflected in P&Ls, Tax Returns and other Financial Records can be very helpful in determining cash flow available to a buyer. Growth potential can be measured based on actual experience rather than proformas associated with startup ventures.
The need for additional working capital is reduced due to the immediate cash flow being generated by the acquired company. Working capital needs for companies carrying substantial Accounts Receivables can often be addressed and rolled into SBA Loan project costs.
Obtaining trained and knowledgeable employees who are familiar with the business operation, local market and know the businesses customers and vendors.
Gaining established customers significantly reduces the time and marketing costs it would otherwise take to attract an adequate number of customers to support the overhead of a new operation.
Obtaining or transferring existing licenses and permits can often reduce the time and cost of making application, gathering information and conforming to required regulations, not to mention leasehold improvements already in place and operating as a turn key entity.
Sources of capital to purchase existing businesses are more readily available than startup ventures. It is also at times possible for the seller to finance a portion of the purchase price as long as they secure from a collateral viewpoint in their position as a lender. Banks and other financial institutions prefer to loan money for existing operations that have a proven track record than to fund high risk start-up ventures.
The Series of Events
Buying a business is a serious undertaking and should not be taken lightly. Working with professional advisors is the key to successfully finding and purchasing a business. Friends and well meaning relatives are not usually qualified to provide the specialized advice needed for a business acquisition. Seek out an experienced business broker who can assist you in finding a business and coordinate the sequence of events. Utilize an accountant who can help you with the due diligence process and advise you on tax and record keeping issues. Obtain legal advice for business organizational requirements and legal documentation for your acquisition through a qualified Attorney of your choice.
Finding A Business To Buy
While there are a number of ways to find businesses for sale, utilizing the services of a business broker can greatly expedite the process. Business brokers are experts in their industry and assist you in locating a company that meets your acquisition criteria in a prompt and professional manner. When selecting a company that specializes in selling businesses, verify the following information which will help ensure that you are properly investing your time and money.
Is the Agent you are dealing with a full time, experienced business broker ?
Are they a member of the Business Brokers of Florida (BBF), the Florida Business Brokers Association (FBBA) or the International Business Brokers Association (IBBA)? As a member of these organizations, brokers are obligated to adhere to practice standards and a code of ethics.
Ask for references of former clients and customers or obtain a recommendation from other professionals.
When you meet with a Business Broker, be prepared to discuss your background, work experience and financial ability to purchase a business so that we can help you find a business that meets your needs. You will need to prepare a personal resume and financial statement which will be required by brokers, sellers, lenders, landlords and others who will be a party to the business acquisition. The following are examples of the questions a Business Broker will be asking you.
A. Why do you want to buy a business?
B. What are your special skills and educational background?
C. What is your work and/or business ownership experience?
D. What are your hobbies and areas of special interests?
E. What is the maximum amount of your personal funds you can invest as a down payment?
F. If you have an equity partner/investor, how much do you expect them to invest of their personal funds?
G. Are you willing to pledge personal assets as collateral to obtain a loan ?
Define Your Acquisition Criteria
A. What business categories are of most interest to you?
__ Service __ Retail __ Wholesale/Distribution
__Manufacturing __ Restaurant/Fast Food
B. Is there a specific type of business that you are interested in purchasing?
C. If you are not sure of the type of business you want, are there any businesses you do not want to purchase?
D. What is the minimum income you require from a business to meet your living expenses?
E. What is your preference for the location of a business?
F. How far are you willing to commute for a good business?
Review Businesses For Sale
Based on your qualifications and acquisition criteria, a Business Broker will review with you several businesses that meet your needs. Profiles that provide a summary of the business and financial information will be provided after you sign a Confidentiality Agreement which is required by the Business Owner and the Broker.
Meeting The Business Owner and Touring The Facilities
After reviewing the information on the business profiles, a Business Broker will answer any questions you may have about the businesses or will obtain the answers from persons deemed reliable. Once you select those businesses that you believe best meet your acquisition criteria, the Business Broker will schedule appointments with the business owners so you can see the facilities and operations.
- It is common for the business owners to require all meetings with prospective buyers to be during non-operating hours to avoid premature disclosure to employees and customers. The Business Broker will attend these meetings to introduce you to the business owner and facilitate the showing. Employees are typically not aware of the sale until after the sale has closed and the Seller introduces the Buyer as the new owner of the business. Employees may be a little nervous at first but are as anxious to retain their employment as the new owner is to retain their services. The Buyer reassures the employees that their job is secure and that they are excited to have the opportunity to get to know them and work with them.
- When meeting with a business owner, you will be able to tour the facilities and ask questions regarding the operations of the business. It is best not to discuss the price and terms of sale with the business owner. The Business Broker should be able to explain the basis on which the business was valued and the terms of sale required by the owner.
Please remember to keep all proprietary information you obtain about the business confidential. Only discuss this information with your professional advisors and spouse, and remind them that the information is confidential and not to be disclosed to other parties. In most cases, the employees, customers, suppliers, landlords and lenders are not aware that these businesses are for sale. Premature or unauthorized disclosure could have a negative impact on the business being sold and potentially have legal ramifications, so confidentiality is a must for all concerned parties.
Contract for Purchase and Due Diligence
At this point you have reviewed operating information and financial summaries of the businesses that meet your acquisition criteria, and you have met with the business owners and toured their business facilities. You should now be ready to select the business that you feel best meets your needs and begin the process of making an offer and entering a due diligence period. Checking out the business can be very time consuming for both you and the business owner.