What Should You Know Before Buying a Business? | Why Should You Buy an Existing Business?

A business is an organisation or entity that sells goods or services for a profit. Every successful business, whether established and operating for a number of years or a startup, reaches a point of seeking growth. This growth comes from different avenues – exploring a new market, introducing a new product, merging with another company or buying an existing entity.

Reasons to Buy an Existing Business

• Better Financing Options
• An Established Brand
• Existing Customers
• Ready Supply Chain
• Well Trained Staff and Established Internal Processes
• Set Business Operations
• Greater Likelihood of Success

Things to Consider Before Buying a Business

• Perform Due Diligence
• Evaluate the Financials
• Business Entity Status Confirmation
• Legal Liabilities
• Understand the Industry and the Business Outlook
• Understand Operations
• Detailed Asset List
• Verify Business Licenses and Permits
• Check for Zoning and Environmental Regulations

Reasons to Buy an Existing Business

Even small business owners work long hours and take on many roles requiring a broad range of business skills. Potential business owners may be looking to purchase a business with a set loyal customer base and a steady revenue stream upon which to build further. Although the initial investment may be high, there are various reasons to buy an existing business:

Better Financing Options

Established businesses have a steady revenue stream that covers costs and generates a modest profit. They have also built a trust based reputation in the entrepreneurial community. This builds a strong foundation for money lenders and investors to finance further expansions and offer money at favourable terms. Established businesses also have assets and inventory that can be used as collaterals to secure loans.

An Established Brand

A business that has been operational for a few years enjoys brand loyalty with customers and a good reputation in the market. As a new owner, adjusting a brand with a loyal customer base is much easier than building a market from the ground up.

Existing Customers

It is advantageous to count on a reliable set of customers right from the beginning rather than build a base. This allows the owner a two-way benefit – A great customer base and a steady revenue flow.

Ready Supply Chain

A ready supply chain is an important network of business contacts that acts as a guide on sustaining and improving business functions. An existing relationship with vendors, suppliers and other business partners can help a smooth business transition.

Well Trained Staff and Established Internal Processes

Perhaps, nothing is more critical to a successful business than a well-trained workforce and established operational systems. This makes the business very attractive to buy.  

Set Business Operations

An existing business operation will have systems and processes in place to track its various activities like financial information, inventory, sales, purchases, and stock as well as processes like accounting, expenses, salaries etc.  

Greater Likelihood of Success

If the business that is being purchased has been in operation for at least 5 years, chances are the original owners are offering a product or service that has a verified market in the community. This increases the chances of further success compared to an untested startup.

Things to Consider Before Buying a Business

Having said all of the above, there are still questions that must be answered and information that must be verified when buying a business.

Perform Due Diligence

Due Diligence is akin to research to confirm that all operations are above board and that there is nothing going on operationally that can potentially present a risk or be considered illegal. This also helps in assessing business valuation, helping in the final decision to move forward with the purchase.

Evaluate the Financials

This is the key aspect of research and an accountant can be a big help in assessing the company’s financial health. Important indicators like sales, profits, debt, expenses and cash flow can reveal any anomalies and flag any potential risks.

Business Entity Status Confirmation

If the business is set up as a corporation or a Limited Liability Company (LLC), reviewing entity documents and all related records such as bylaws, resolutions and operating agreements is wise. It is also prudent to check in what state is the business registered and whether it operates as a foreign corporation from any other state.

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Legal Liabilities

If the company is engaged in a legal liability battle in the middle of a buy-out, chances are the new owner can automatically be a party to such a fight. It is important to ensure if there is any inheritance of any legal liabilities such as liens or judgements against the company itself or any of its executives that might be a part of the purchase.

Understand the Industry and the Business Outlook

It is important to get an in-depth understanding of the commercial aspects of the business like market outlook and trends, its competitive advantage, its client base, etc. It is possible that one or more of these external factors may be playing a part in the sale of the business. Understanding how the business is perceived by the market helps in getting future projections in a realistic context.

Understand Operations

Ensuring that the business is running as smoothly as is being said requires a deeper look into the what, where and how of its operations. Among other things, a working capital assessment, a manufacturing and operations evaluation, a supply chain review, and an analysis of capital expenditure must be present on the checklist.  

Detailed Asset List

The purchaser must have a detailed checklist of all the assets and their value that are included in the deal. If this includes intellectual property, then a confirmation must be taken that the ownership of the brand name and any trademarks or patents are included in the deal. The capture and protection of the intellectual property must be evaluated. This due diligence will protect the most important assets of the company, especially in the field of science, technology, or research & development.

Verify Business Licenses and Permits

Any business has its own specific list of licenses and permits that are required from local, state or central government authorities for a smooth operation. Verifying that all the licenses and permits are kept up to date and current can save the new owner from potential fines and continue operations without interruptions.

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Check for Zoning and Environmental Regulations

If the business comes with property, it is prudent to check for zoning regulations to determine if the business activity is permitted. It might also be in the new owner’s best interest to check if the operating business faces current or potential environmental liability. Depending on the nature of the business, this could include a lack of applicable licenses, hazardous material contamination, permit violations, and enforcement deficiencies.

Conclusion

There are a lot of considerations involved in buying an existing business that must be evaluated with the help of professionals like a lawyer, an accountant and a business valuation professional.

Once all the due processes and considerations are complete and the sale agreement goes through, the new owner can revitalize the company with fresh ideas and a new leadership.

FAQs

What should I look for when taking over a business?

One should look at the following aspects into consideration when taking over a business:

• Business Entity Status Confirmation
• Evaluate the financials
• Understand Operations
• Understand the Industry and the Business Outlook
• Detailed Asset List
• Verify Business Licenses and Permits
• Check for Zoning and Environmental Regulations

How do you figure out the worth of a business?

The simplest formula to determine the value of a business is to subtract the liabilities of a business from its assets.

Is buying a business a high-risk investment?

Usually, buying an existing business is less risky. Although the initial investment may be high, there are various reasons to buy an existing business like an already-developed relationship with vendors, suppliers and other business partners that can help a smooth business transition.