Published On: Sat, May 14th, 2016

Considerations before Buying an Existing Small Business

Buying an existing business can pose a smaller risk than starting one from scratch. But while it may be less risky in most aspects, you also need to ensure that you are aware of all the basic aspects of the business before buying it.

There are many advantageous aspects to obtaining an existing business such as extreme reduction in start-up costs. You may be able to jump start your cash flow instantaneously because of the businesses’ existing inventory and receivables.

The assets. What exactly are you buying? Is there a store location, equipment, inventory, a lease, recipes and secret formula, debt, etc.? Start by assuming that you are doing an asset purchase where you’re not responsible for any debts. An attorney can help draft such agreement.

When buying a personal property, you have to ensure that the original owner has all the mandatory papers for selling. You need to find out if the seller has complete registrations over his or her property. Utilising a PPSR basic search, for example, will help you ensure that what you’re getting is a legitimately owned business. Risking your investment isn’t worth it if what you’re getting is a sham.

photo TheAndrasBarta Pixabay

photo TheAndrasBarta Pixabay

All legal businesses need permits and licenses to operate. The kind of license or permit you’re required to have depends on your chosen industry and the state where the business is located.  Use SBA’s permits and licenses finder tool to get a listing of state, federal and local licenses and permits you need to run your business.

Price is important, but not really. Many would-be business buyers are worried about the capital right off the bat. How much are they asking and what comes with it. You are not just buying a business; you are buying a vehicle that generates cash or you are purchasing assets. It’s that simple.

As a buyer, you need to know all the terms and adjust your price discussion based upon that risk. You can work a deal on the contract terms to make it fair for the seller to discuss the risk with you. If both parties are willing to work it out, the final deal will be a mirror deal, or a win-win. No matter how you look at it, the deal will be favourable for both parties.

Consider the cash generation. You’re buying a business because you believe in its profit potential. A business only has value if it generates cash. Goodwill, intangibles and such are ways business owners try to embellish the value of their company. They may help the sale, but they are unsellable so it’s of slight value when it comes down to calculating the value of the business.

Final thought

Do not rush into purchasing a business. Due-diligence is vital. It takes a lot of time and consideration, so don’t believe anything until you see it in writing – all the necessary documents. Don’t be emotionally involved, even if buying a business is your lifelong dream. Like when you’re thinking of buying a second hand (used) car, even if you lose the chance, you know that there will always be another in the lot.

Guest Author: Lolita Di

On the DISPATCH: Headlines  Local  Opinion

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- Outside contributors to the Dispatch are always welcome to offer their unique voices, contradictory opinions or presentation of information not included on the site.

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  1. SEOIUM says:

    What is the best trade that can be done with low budget?

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