Are you thinking about purchasing a business? Here are five steps to finding the appropriate company and closing a good transaction.
1. Consider the Benefits and Drawbacks of Purchasing a Business
There is less danger. Buying a company, as opposed to creating one, provides you with instant cash flow and profitability. You will get a well-established name and brand, a devoted client base, valuable patents, and a successful business model. There is no need to create organisational processes and regulations, or to recruit and train new staff.
Financing will be easier. Because of the lesser risk, obtaining finance is significantly simpler than if you were to start a new firm.
More expensive. Buying a firm, on the other hand, generally requires a higher initial expenditure than establishing one. All of the effort done to reduce your risk will cost you extra since it is worthwhile.
Problems that aren’t obvious If you don’t do your homework, you might end up with obsolete merchandise, troublesome workers, hidden debts, and outmoded work practises.
2. Choose the kind of company you want to acquire.
It’s critical that the company you acquire is a good match for you. The US Small Business Association (SBA) suggests that you know the answers to the following questions:
What are your hobbies? Choose an industry in which you have a strong interest. If you don’t have a strong preference, start by eliminating all ones that don’t pique your attention.
What are your strengths and weaknesses? Be brutally honest with yourself about your talents and flaws, and then match them to a company. Choose a company in which you have no relevant experience or understanding.
What kind of business circumstances do you require? Make a list of the business conditions that must be met in order for you to succeed. This comprises the size of the company (the number of workers, locations, and revenues), the geographic location (labour pool, cost of living, cost of doing business, taxes), and the time commitment.
Why is this company for sale? Begin your search for particular firms to purchase using these parameters. Examine newspapers and ads, create your own want ad, contact a business broker, or even cold call firms that meet your criteria. Just because a company isn’t on the list doesn’t mean it’s not open to proposals. However, it is critical to understand why a company owner want to sell. It will assist you in determining its genuine value and negotiating a fair price.
3. Determine the Business’s Value
To properly price a firm, the SBA suggests adopting the following methods:
Approach to Capitalized Earnings Determine the expected return on investment.
Method of Excess Earning. Determine your expected return on investment by segregating return on assets from other profits.
The Cash Flow Method Calculate how much of a loan the company’s cash flow can sustain. This adjusted cash flow may be used to assess the firm’s capacity to pay debt.
Method of Tangible Assets (Balance Sheet). Use physical assets to determine the worth of a company.
Method for calculating the value of certain intangible assets.: Compare the cost of purchasing a desired intangible asset vs the cost of developing it.
Finally, examine the company’s reputation as well as its commercial ties. Entrepreneur Magazine recommends conducting interviews with consumers, suppliers, and vendors. Check with the Better Business Bureau, industry groups, and licencing and credit-reporting agencies to ensure the firm has no complaints.
4. Purchase Financing
Consider the following three methods for obtaining funding:
Financing via debt. Borrow money from a third party — most often a bank, but consider loans from friends and relatives — with the intention of repaying it with interest. The SBA provides bank guarantees in order to reduce the risk of long-term small company loans.
Financing via equity. Investors may purchase stock in your company. You relinquish some ownership and authority, but you are not required to repay debt.
Seller financing is available. Take out a loan from the seller. This normally entails higher interest rates, but it provides an incentive for the seller to keep the firm successful. It also provides you greater negotiating power when it comes to loan conditions.
5. Price Negotiation
There are several reasons why discussions get stalled. These recommendations may help you avoid a lengthy process:
Consider the complexities. Before beginning discussions, make sure you understand the seller’s emotional attachment to the company. If the connection is too strong, it may be difficult to get a reasonable price. Determine if the vendor is exaggerating the price to pay off other obligations.
Prepare for unexpected events. Make your offer conditional on certain requirements being satisfied. As a result, if you discover any misrepresentations by the vendor, you may negotiate a lower price or pull out of the purchase. Make this offer in writing and only pay the full amount once you’ve done your research and are happy. As a sign of good faith, place a tiny proportion in an escrow account.