Buying an Existing Business: Part 2
This article will address what a purchaser should consider before purchasing an existing business. Part 1 of this article addressed why a person should consider buying an existing business. Part 3 will address the legal impact of buying an existing business.
What to consider when purchasing an existing business?
Buying an existing business is a major commitment and investment. It is not something that an individual should take lightly, even if the existing business appears on its face to be profitable. Indeed, an individual must be cautious about purchasing an existing business and conduct extensive due diligence before buying the company, firm, or business. Below is a list of some questions, but not all, that a potential buyer should consider before any purchase occurs.
What is your skill set?
- Many new business owners that purchase existing businesses may actually do it for the wrong reason. Although the existing business may be profitable at the time of purchase, it will still require strong leadership and organizational skills to keep the business afloat. The prior owner laid the foundation for success, but it will be the new owner’s task to remain profitable. You must realize certain businesses require a business owner to possess certain skills.
- For instance, if you purchase a catering business, you must understand it will require some culinary skills and to work irregular and long hours in preparing the food for an event. A catering business owner also manages staff and works directly with its customers.
- Another example is a person who buys a pool maintenance company. It will likely already have existing customers and therefore the business owner must possess the skill set to actually maintain and clean customer pools from day one. A business owner must understand what chemicals and equipment are necessary to complete these tasks.
What are your interests?
- A potential business owner should realize that becoming a business owner is a major responsibility. Some businesses require long and irregular hours and thus a potential buyer must think hard about what specific jobs would interest them on a day-to-day basis. Although a business may be profitable to start, a new owner must maintain the same level of customer satisfaction and standards set by the previous owner. If you are not passionate about the type of work, the business may falter as a result.
Why is the existing business on the market?
- This may seem like an irrelevant question, but it is actually one of the most important inquiries one must make. This question too often gets overlooked after a potential purchaser reviews a business’s positive revenue and profit streams. A purchaser must step back from the purchasing process and realize the person selling the business may or may not be doing it for personal reasons, such as retirement. For example, the market may have become more competitive than in previous years and it may make sense for the owner to get out before the market becomes saturated. Whatever the owner’s reason may be, it is in your best interest to determine why the business is being sold. You must not take a seller’s reason at face value.
How do you determine the right price?
- This process requires expertise. A potential purchaser must realize that the seller wants to get the highest price for the business. An experienced business law attorney can help you with the process of analyzing the purchase of an existing business, perhaps in concert with a qualified business appraiser and a certified public accountant. The CPA would inspect the financial records of the company and report to the appraiser figures on which the appraiser would rely in formulating the fair market value and, perhaps, the purchase price. Further, that lawyer can help you negotiate and contract for the best price for the business. There are numerous market factors that go into a proper purchase price and you want to make sure you get the best possible deal to start your ownership on the right foot. Further, an attorney can provide you with sound and independent counsel and will not hesitate to advise you that a deal is bad.
How are you going to finance the business?
- An existing business unlike a new business may have a higher upfront purchase price. However, financing the purchase of an existing business is generally easier because of its track record of previous success. It is important to understand the legal consequences of your financing options. Unfortunately, many business owners enter unfavorable agreements because they are in a hurry to buy a business. It is important that you determine the best financing route for your personal situation. A competent business law attorney can provide you with guidance and information about your financial options.
In sum, a purchaser must do his or her due diligence before purchasing an existing business entity. A purchaser must also understand the legal ramifications of purchasing the business (see part 3). Throughout this process it is important that you consult an experienced business law attorney to help you each step of the way. The Office of Knellinger, Jacobson & Associates can help you with this process. We have been serving business owners in North Central Florida and the Gainesville community for over 40 years.
Knellinger, Jacobson & Associates | 2815 NW 13th Street #305 | Gainesville, FL 32609 | (352) 373-3334