Acquiring a Small Business

Are you dreaming of being your own boss? Starting a business is the best way to do so. However, it is not always easy to break even, and within a few years of a rocky start, the same people decide that selling a business is better than risking going bankrupt. Then the cycle goes on.

Questions to Consider Before Buying a Business

Upon deciding to buy a business, it is important to know the reasons for buying. There are a lot of decisions to be made, and do not think this decision should be made on a whim.

Attributes

Ask yourself why you want to buy a business in the first place. Is it because it is cheaper, or do you want to save a dying business from ruins? Do you think you are ready to become your own boss? Knowing why will ensure that you are acquiring a business for the right reasons.

If you think you are ready to own a business because you have good business sense and leadership skills, you may be well on your way to starting a business. The attributes a good entrepreneur should have include the following

• You are a Risk Taker

There are a lot of risks in having a business, and successful entrepreneurs tend to be fearless leaders & should be ready to take calculated risks.

• You are Tenacious

Having the drive to run a business is no longer enough — you should also have what it takes to stick with your decisions to see your business through.

• You are Confident

Breaking out of your financial shell and attempting to persist in the difficult world of business will require you to have the confidence to see your vision through.

• You are Adaptable

The economy is a fickle thing, and it requires a person to be adaptable to navigate the changes that it brings as the business ebbs and flows with the tide.

• You are Curious

Businessmen should be curious, because this curiosity has led many in finding ways to solve their problems and find strategies to keep their business thriving in unstable economies.

• You are Restless

There is a lot of work to be done in running your own business, so you should have a lot of energy to devote to your new acquisition to help it grow.

• You are Focused

Focus in business shows that you are able to juggle tasks, but a good entrepreneur will know how to strategize and see the bigger picture with ease.

• You are Rebellious

There are a lot of risks to break out in business, especially when this means stepping outside the safety and security of a corporate job; however, businessmen are known to break the mold – and your rebellious streak may have resulted you in doing so.

• You are Competitive

Businessmen are successful because they have intense drive and motivations to outdo everyone else – most entrepreneurs simply won’t stop until they are on top.

• You are a Builder

Businessmen are known to build success – it does not need to be physical but a good entrepreneur can make something out of nothing, making them a special brood.

Acquisition

Once you’re sure why you want to acquire a business, think of what it is that you are buying. Think about which kinds of businesses you are interested in, or find one that is in an industry in which you have familiarity or understanding.

How will you know if you are buying the right business? Some considerations include the following:

• Does the Acquisition Extend to your Brand?

Business is not like a game of monopoly where you buy what you can afford: your passion and understanding of the brand will definitely make it easier for you to run a business. Do you know the current market conditions? Find out about the competitors in the industry and check if the market conditions are favorable for both short and long terms.

• Do Numbers Match Up?

Upon taking a closer look at the existing books, do the numbers match up with what you see in the business at face value? If a seller does not let you take a look at the audits, it may not be a good idea to buy the business.

• Do they have Legal Issues?

Acquiring a business or company will include their baggage. It is easy to become blinded by a company that you like, but remember to be diligent in looking through legal issues, so that you can be sure you won’t be inheriting them as well.

• Do you know the Ongoing Costs?

While it is easy to focus on the company’s performance, understanding the costs of keeping the business afloat is even more important, especially as this will affect your cash flow.

• Do you Think it has your Ideal Company Culture?

Buying and starting a business usually means buying its current employees, so you also have to make sure that they have the same personal values as you do.

• Do you have Aligned Company Values?

Not only do you need to know if their products, services, and offers complement your skills, you should also know whether or not your potential acquisition matches your own vision of company values.

• Do the Owners Maintain Interest in Their Company?

Look closely at the interest the current owners have in their business, because if they have lost interest, you may be stuck with slow sales and neglected equipment, leading you to invest more capital.

• Do you Think the Company Can Pass your Own Surveillance?

Go in the business secretly for a day and gauge their customer service, cleanliness, staff enthusiasm, and general activity. It will open your eyes to potential warning signs in the way the business is being run.

• Do you Know What your Gut is Trying to Say?

In business, go with your gut. Trust your instincts, they will tell you if things just don’t stack up the way they’re supposed to.

Geography

Next, you have to decide where to find the business that you want to buy. Geography plays a big role in acquiring a business because it will help you assess your labor pool and costs – even wages and taxes. So make sure that you find acceptable all these details presented to you.

Upon finding the locale in which you want to have your business, it is time to start looking for one that is for sale. Here are some ways to start looking for people who are selling a business:

• Take a Look at the Classified ads Section

Businesses for sale are usually listed in the newspaper under the title “Business Opportunities” or “Businesses for Sale.”

• Run your Own “Want to Buy” ad

Here, you can describe what you are looking for and have the business owners call you instead.

• Talk to Business Owners

Just because their ad isn’t listed in the newspaper, it doesn’t mean they are not open to doing so.

• Put your Networking Skills to Good Use

Who knows, a friend of a friend of a friend may be selling his own business.

• Contact a Business Broker

These people are usually hired by sellers to help them negotiate with buyers, so they can definitely find you a business if so desired.

Factors

Once you figured out the geographical location you want to put your business in, take a look at other factors, such as knowing how to find those that are for sale, and assess which ones may be a prospect for you. Among the factors you should consider in starting a business include:

• Location To know whether or not you are at a strategic place to start a business.
• Furniture, Fixtures, and Equipment to know if things are well kept.
• Inventory of Goods and products to get an idea of what you have to deal with on a regular basis.
• Trained Employees who will help you run the business more smoothly.
• Established Customer Base that could help keep the business alive.
• Existing Cash Flow of the business as well as your own to make sure you can pay expenses and make an actual living.
• The Industry Itself to have an idea of what the future of the market will hold.
• Your Competition to gauge your future customer base.
• Financial records of the seller to know what you are getting yourself into.
• Your plans for improvement to get an idea on how much the business will actually cost you.

Negotiations

Knowing how much businesses cost in different industries needs a lot of research. Not to mention, negotiating costs of a business can be difficult, especially if you are a first-time business buyer. In this case, you may want to contact a business broker to help you negotiate costs and save money. Although they charge commission, the assistance that they can offer you is almost always worth it.

Here are the average costs of small businesses in different industries:

• Beauty Salons and Barber Shops – $80,000
• Landscaping and Yard Services – $128,500
• Restaurants – $130,000
• Apparel and Accessory Stores – $160,000
• Amusement and Recreation $165,000
• Convenience Stores – $175,000
• Bars and Taverns – $195,000
• Dry Cleaning/Laundry Services – $199,000
• Auto Repair, Parts, and Services – $240,000
• Gasoline Service Stations – $252,500
• Liquor Stores – $270,000
• Supermarkets – $270,000
• Educational Services – $275,000
• Health, Medical, Dental – $325,000
• Construction and Special Trades – $356,000

Factors to Consider When Buying a Business

There are a lot of factors to consider in buying and starting a business. Whether you have the cash to spare or don’t, it is important that you assess the future of your potential business very carefully. In fact, there are questions you have to ask yourself.

Questions to Ask

Among the questions you have to ask yourself before buying a business include the following:

• What are the Biggest Challenges you are Facing at this Moment?

For instance, when it comes to monetary expenses, you have to make sure that you know how much you need upfront, even while in the negotiation phase.

• What Would you Have Done Differently?

Upon speaking with the owner of the business you want to buy, you should know if there is anything you would have done differently. This will help you learn what the growth potential of the business could be.

• How did your Seller Come Up With Their Asking Price?

Sellers usually base their price on factors such as how much they will need to move forward with their lives, but there is room for negotiation, so look into their quantitative data to back up their price, or your negotiation.

• What Negotiating Powers do you Have?

If the owner plans on closing the business if it’s becoming impossible to sell, then you will have more room to negotiate a lower asking price.

• How Will you go at the Financial Aspects of the Business?

To keep your business legit, it is important that you have a clear paper trail for the company’s financial data such as tax returns and other documents that could indicate the company’s revenue, income sources, and profits and losses.

• Are you Sure you Won’t be Inheriting a Lawsuit?

Any past or pending legal proceedings could be a headache later on, especially because it could involve you in litigation. To circumvent this, you may get in writing a statement from the current owner in case there are any legal matters that could come to light later on.

• Did the Business Document its Procedures Well?

While small business don’t always have set procedures, you may want to know the general direction in which they are going and ask for manuals on company practices and policies, if possible.

• Do you Have the Skills and Qualities that Could Help Run the Business Effectively?

Know that there are physical and social demands of running a business, so make sure that you have what it takes to run it.

• Does the Business Depend on Key Customers or Venders?

Despite a seemingly successful business, if it depends solely on one key target customer or vendor, you will be taking a big risk, especially if these customers and vendors have a loyalty to the current owners.

• Does the Staff Know What to do After the Sale?

If key employees will decide to leave, you may want to have them sign non-compete and non-disclosure forms before the official sale of the business to keep your investment safe.

Valuing a Business

There are different ways of valuing a business. In fact, there is no “right” way of doing so. However, what you have to remember is that the worth of the business is based on the criteria that you set forth yourself. Start by looking at the value of the business based on their assets, such as the things that it owns, its equipment, inventory, and even financial records. However, the financial side is not all there is to it. Non financial considerations, such as your dreams and aspirations could also influence the value you put in a business, but you have to be careful that you don’t overvalue a business based on your personal preference.

Checklist of What to Look Into Before Buying an Existing Business

• Check the Inventory

Including the products and materials that are set for resale. Remember to have a qualified representative present during the examination of such inventory.

• Fixtures, Furniture, Equipment

Make sure to determine the present condition and market value upon its purchase and the present, and whether or not such equipment have been leased or purchase. Check that the facility in itself is in good condition, and consider the modifications you have to make in the business before running it as your own.

• Have Copies of all Contracts and Legal Documents

Including purchase agreements, distribution agreements, tax returns, and financial statements, among others. It is advisable to have a lawyer look into the documents if necessary. Consult an independent attorney and even an accountant to check a complete list of liabilities to determine the costs and ramifications that could potentially cost you your business.

Speak with Business Advisors

Business advisors can help you solve your business problems and help you become more informed about owning a business. Many sole traders and business owners tend to speak to business advisors when they face challenges, so it will make sense to do so while still in the process of starting a business through acquisition. Some questions you may ask your advisor may include the following:

• Is there Longevity in the Demand for the Business?

You will want to know if your business can survive long-term.

• Are There Holes in the Current Owner’s Financial Status?

You don’t want to inherit problems regarding rent, loans, and other payables you didn’t sign up for.

• What is the Best Way to Finance the Business?

Backed lenders, equity loans, and private partnerships are some ways to finance a business, so you should ask your business advisor to help you figure out what will work best for you.

Documents Needed in Acquiring a Business

Here is a list of documents that you will need to check when acquiring a business:

• Confidentiality Agreement

sellers typically want to keep the sale confidential from clients, staff, and third parties.

• Heads of Agreement or Heads of Terms

these normally has clauses that state the subjectivity of the contract. Despite being an outline, it can be as detailed as necessary.

• Due Diligence Questionnaire

This targets a business to ensure that you get all the right information from the seller, and that there are no other hidden problems that you may have to deal with unknowingly in the future.

• Asset Purchase Agreement

prepare yourself for the first cut in business acquisition. This agreement should describe all the assets being bought, such as machinery, stock, contracts, and even intellectual property. However, it will also list all the assets that are not part of the purchase.

• Share Purchase Agreement

if your deal involves company shares, you will have to look into the share purchase agreement, as this will document the assets and liabilities of the company.

Budgeting and Finance

The financial aspect of the business is essential in running a business. However, the task of getting a budget together can be daunting to new entrepreneurs. However, there are several ways to fund a business, such as factoring, getting a bank loan, crowdfunding, attracting angel investors, or even by using into your own credit card. List the pros and cons of each of the options you are considering, or talk to a business professional to help you decide.

Mistakes to Avoid in Purchasing a Business

Many people fail to think things through when purchasing a business, so it is important that you don’t overlook, or make these mistakes when starting your own business:

• Buying the Wrong Business

While running a business is a skill, you have to make sure that the business you choose to acquire will suit your knowledge, personality, and interests as well.

• Signing Contracts in Your Own Name

The reason most people don’t sign contracts in their own name is to avoid subjecting their personal assets to the risks that businesses present. Instead, set up corporations or LLCs to keep your personal assets safe.

• Not Doing Due Diligence

The apparent success of a business does not automatically mean that it has no problems. Always do due diligence to avoid getting surprised with piles of bills and other outstanding debt.

• Ignoring Company Image

Most businesses, especially those that are able to establish an image or brand, have customer familiarity, so changing it quickly may defeat the purpose of acquiring a business.

• Not Ensuring a Favourable Purchase Contract

Negotiate details when you acquire a business. Discuss physical concerns regarding the property, assets, and event trademarks, and stocks, among others. Define the responsible parties in each area and ensure that you consult an experienced lawyer to help you look over your contract.

What to Do After Buying a Business

Priorities After Buying a Business

The process does not end with acquiring the business. In fact, there are still a lot of things to do after acquisition, some of which are the following:

• Do an Audit

Give yourself time to be familiar with the ins and outs of the business. Understand the ins and outs of the business before deciding which changes to make, and ensure that you understand the security programs.

• Communicate with Existing Staff Members

While it is unlikely that you can immediately afford to keep all the existing staff members, you have to make sure to communicate with them properly to avoid fear of change and modifications throughout the company.

• Understand Company Culture

Analyzing the company culture could lead to finding the key factors that contributed to the company’s success or downfall. However, if there are changes that you feel needs to be addressed, develop a plan that shows the staff how it could benefit the business as a whole.

• Plan the Changes Carefully

Making significant changes isn’t always the best approach, so try to figure out how to do so with minimal disruptions to employees and customers. Remember that the speed in which you implement change can have a huge impact on the company.

• Be Transparent to The Staff Regarding Said Changes

People will not always be happy with change, so be up front and honest with your staff about impending changes, how you arrived at your decisions, and allow them some time to learn why such changes are being made.

Dos and Don’ts in Buying a Business

A good entrepreneur knows that there is a limitation to the power of being a business owner. Buying a business can be frustrating, so it is important that you take specific steps to avoid problems in your new venture.

• Do Innovate

Successful businesses are innovative. They offer new products and adopt new technology. Do ask for advice – It is virtually impossible for you to be an expert on a new business, so don’t hesitate to ask for advice. Advisory boards and consultants are particularly useful in producing huge benefits for small and mid-size businesses.

• Do Have a Solid Plan

Businesses with concrete medium-term plans can follow their progress with the help of performance metrics. Using this can help you gauge whether or not there is improvement in your sales.

• Do Hire the Best

Hiring only the best candidates in key roles and positions will save you more money in the long run as it will take less time and effort to train them. Do build strong relationships with suppliers – Most successful businesses rank supplier relationships as the most important, because the flow of the business will depend mostly on them.

• Don’t Rely on Few Customers

Learn to diversify your target market or risk losing your business when you lose them.

• Don’t Underestimate the Importance of Managing Finances

The right knowledge and right tools will help you manage your finances better, and will therefore keep you from running into major financial difficulties.

• Don’t Forget to have a Contingency Plan

unforeseen events such as natural disasters can be problematic and will cost you a lot of money. Make sure you have a backup plan for your business in case such things happen.

• Don’t Ignore the Market

Rapid technology changes can make revolutionary changes, and failing to adapt to technology and your market as a whole can cause your business some problems.

• Don’t be Embarrassed to Get Help

No matter how capable you think you are, it is never a good idea to try solving problems on your own. Early action in the business can help lead to a more successful turnaround, so be transparent with your stakeholders and ask for help if needed.

Pros & Cons of Buying a Business

When put in the situation of deciding whether or not to buy an existing business, you would want to weigh in the pros and cons. Buying a business has its own advantages, but you may also want to consider the drawbacks.

Here are the pros and cons of buying an existing business, for your consideration:

Pros

• You Can Easily Get Someone to Finance the Business

The assets that you are buying will help you secure your financing needs, considering that lenders are more likely to finance an existing property with such records.

• You Will Already Have an Established Customer Base

With customers that are already familiar with the company’s brand, there is no need for you to start from scratch. You can put your focus on building up your revenue and marketing efforts instead.

• You Have a Guide to Help you Make Informed Decisions

The existence of business records from the sellers will help you see the company in longer terms and observe their practices. Soon, you can base your future decisions on them.

• You Already Have Experienced People in Place

Training usually costs a lot of money. However, there is no need for doing so if you purchase an existing business and retain key staff members who has had the experience in running the company.

• You can Focus on Working for Growth

Without the need to build up practices from scratch, all you have to do is establish the brand and focus on the areas that need a little help, and thus, steadily hone and grow the business.

Cons

• You Could Look Into Poor Company Fit

A business that you want to acquire may not necessarily fit with your existing strategic goals. A poor acquisition choice could eat up your time, money, and resources if not handled properly.

• You Could Have Trust Issues with the Staff

Establishing trust can be difficult, especially if workers are a bit defiant regarding the purchase of the company.

• You Could Have Difficulty Merging the Business Culture with Your Own Ideals

If your staff is not keen on changing business practices, you could have a potential problem in your hands. This will be even more pronounced if the policies you want set goes in direct opposition of what the staff is used to.

• Your Customer Base May not Always be Reliable

Even customers who may trust the brand won’t necessarily trust new owners, so a drastic change in the company could prove to be detrimental, and you could face a decline in sales until you are able to re-establish customer trust.

• You Could be Looking at Higher Costs

If you aren’t thorough with your due diligence on the business and properties, you could be looking at higher costs regarding real estate, materials and equipment, financing, and other legal matters.

Summary

Before you invest your money in starting a business, it is important that you know your reasons for doing so and base your decisions on certain parameters. While in the process of buying, you should be aware of how to value a business, and consider several factors before making a decision. Speak with business advisors, lawyers, accountants, and other business professionals who can help you make informed decisions regarding the business that you are purchasing.

Remember that purchasing an existing business is only the beginning. Afterwards, there are more steps that you will have to do in order to help the business grow, such as doing audits and communicating with the staff members whom you want to retain. From there, rebuild the business that you envisioned, whether by implementing existing best work practices, or by turning it completely around.

Whether you’re selling a business or buying one, the cycle that you will have to go through is not simply a walk in the park. Besides the financial setbacks that you will have to face and deal with, you have to remember that you also need to put in grit and effort to become successful as a businessman in your chosen industry. Choose your next venture wisely.