Many people are motivated to start their own business. Maybe they’re tired of their current job, maybe they’ve been downsized, or maybe it’s a ticket to economic freedom. Yet the idea of inventing a new venture may be daunting. Buying an existing business can become a very attractive alternative.
Purchasing a functioning business helps you avoid or reduce many of the initial challenges in starting your own. But buying a business also comes with its own set of demands.
The advantages to buying an existing business include:
- No startup costs
- Immediate profitability and cash flow
- Easier to finance due to an existing track record
- Established customer, supplier and employee base
- Existing systems and procedures
The disadvantages of buying a business include:
- High price
- Risk that customers may not be loyal to the new business
- Many businesses available but difficult to find quality opportunity
- May take a long time to find opportunity
- May require the relocation of family
- Could have embedded systems that are both inefficient and difficult to change
The most important issue when evaluating a potential acquisition is to understand the business’s history and context so you can assess its future potential. The vendor will explain his or her rationale for selling but there are normally many undisclosed reasons to uncover that affect the business’s profitability and viability. Looking at factors such as trends in sales, customer behavior and costs is essential in evaluating the business’s position in the marketplace.
Just like with any major purchase, you need to go through a process of due diligence before buying a business. Your goal is to verify the vendor’s information to ensure you have a complete and accurate understanding of operations. This will help determine the correct valuation for the business and help find any undisclosed issues that affect the business’ valuation, viability or profitability (see Selling Your Business for a discussion of business valuation). Please contact our office for an outline of due diligence items to consider.
The top question to ask when buying a business is this: what value can you add to make it run more efficiently and profitably? If you can’t improve it, you’re just spending a lot of money to buy a job. At Silver + Goren we believe the only reason to buy a business is to substantially increase its value so you may sell it in the future at a substantial gain. In order to do this you need an effective plan to improve business performance and profitability through increased revenues and decreased costs.
If you are still confident in your decision to move ahead with a business acquisition you need professional accounting and legal advice to help you through the process. There are many legal, business and income tax issues that need to be considered in evaluating and structuring the acquisition. Let Silver + Goren help you get started on the right path.