The idea of buying a business probably came to you for some time, and finally, the time is ripe for you to act on your dream. But just before you do, make sure to know by heart the basics of how to buy a business, including things to consider and steps to take. Doing so will save you from tons of heartache and wasted money from a failed business due to lack of knowledge you’re your impulsive decisions. Here are more things you need to know on how to buy a business.
The Upside of Buying a Business
In reality, there are a lot of reasons why business owners sell their businesses. Business owners might be in the stages of their lives that their businesses aren’t fitted for them, or they just want to venture to other types of business, or maybe they’ve just grown tired and bored of their business.
You are not starting from scratch.
When you buy a business, you are handed a proven business model. Compared to starting your own, where you have to build from the ground up, buying a business entails fewer works to get the business running. What goes with buying a business for sale are employees, an existing inventory, established processes, inflow of cash, and financial records. As they say, time is money. The lesser time it takes for the business to start operating, the quicker the money will come in.
More secured cash flow.
Starting a business means you’ll be coughing up cash for the next few months, with an expected negative cash flow for who-knows-when. But when you buy a business, the cash flow is more stable, and the products or services you offer already have their customer base.
Steps to Take When Buying A Business
Anyone who’s eyeing buying a business should know that more money might be needed upfront than if you start your own business. As such, it is important to study the steps well to make sure the venture will be worth the money you spend on it. Here’s what you should do:
Look for a business that suits your passion and interest.
Experience in the industry you’re getting into is crucial in helping you succeed. You won’t have to grope your way as you navigate with a new business; you can use your experience as a platform in running your biz. Moreover, when loaning for money to cover acquisition expenses, lenders will also consider your experience in the industry when you are getting a business loan.
Figure out the resources you are willing to invest in your business.
When we speak of resources, we’re also talking about time. This is crucial as running a business will require your commitment, and you can’t get shortsighted in this. Determining how much time and money you can invest will also help you decide which type of business will match your resources.
For example, in a franchised business, you will have less control of the biz, but you will have stronger support. On the other hand, should you decide to purchase an independent business, you will need to be more hands-on in running the business, which means more time to spend on it as you will not have the kind of support offered by a franchise business.
To also give you an idea of how much time is required in running the business, get insights from the business owner. Other indicators to consider are business size, location, and complexity of running the biz.
Have a strong support base. Hire experts.
It’s okay not to know everything. This should not deter you from getting into a business. You can always hire a team of experts who will do the tougher legwork for you, such as determining business valuation and legal documentation. You will most likely need a lawyer, an accountant, and a banker. These people can help you perform due diligence in business profitability, value, and possible problems in the operations and property and financing.
Prepare a business acquisition checklist. Acquire all information needed for smooth business operation.
One of the more crucial steps to take when learning how to buy a business is to list the business essentials and go and get them. The following are information that you will need:
On finances:
- A 3-year span of financial statements, including income, tax returns, payment receipts, or confirmation for state and federal taxes.
- Cash flow projection for the present year.
- Estimate of additional capital needed to run the business as you go.
On industry and market:
- A comprehensive information on the products and services, which lists pricing system and strategies, matrix and inventory.
- You will also need to know who are your suppliers, customers, and rivals.
- Get as much information about your market and span of distribution.
- Know the history, trends, and projection of the market.
Operations and company details:
- Know your would-be biz's history and study the articles of incorporation, bylaws, and if there are any, the shareholders. Also, secure the Certificate of Good Standing from the Secretary of State and the company's registration papers. Make sure to perform a thorough interview of the owner.
- Know the real reason why the business is for sale. This can get a bit tricky and will require thorough due diligence.
- Get to know which licenses are required for the biz to operate and assess if their licenses are active and if operations are in compliance with state laws.
Staffing and Management:
- Be informed of the history of staffing, including forecasts. Review the personnel's roles, salaries, standing in the company, their contracts, and the benefits, incentives, and packages offered for every employee
- Make sure that the seller will be eager to guide you as you transition into owning and running the biz.
Get ready with your financial needs to close the deal.
After going over every step above, you’re now closer to your plan of purchasing a business. At this time, make sure you have already secured the necessary financial needs to make the purchase. There are several ways to secure financing; you can opt for bank loans, or you may forge a partnership with someone you trust. There are other financial institutions that also offer business financing if your bank disapproves of your loans or if you do not qualify for one.
Set a clear agreement on how the purchase will be made.
You can opt for an outright sale where payment and ownership are transferred immediately as the business is paid in full. You may also agree on a gradual sale term wherein a more flexible, long-term payment option is offered. In this type of acquisition, the ownership rights are transferred once full payment is made. Another route to take on how to buy a business when you do not have the full amount upfront is through a lease agreement. The buyer has temporary rights to run the business provided that contract conditions are met.
Have your lawyer assist you when closing the deal. As you make the final arrangements to sign the papers, make your lawyer is present. They will help you avoid legal pitfalls you may have missed along the way. As this is the most crucial step on how to buy a business, make sure you are ready for this day and are fully equipped with all the information needed to purchase, start, and maintain the business.
Conclusion
With these tips on how to buy a business, you’re now a step closer to owning that biz. There are no shortcuts to business success, and while these steps may be initially daunting, they will lead you on the track to successful business ownership.