Buying Existing Businesses

An entrepreneur or prospective business buyer will consider buying an existing business or starting from scratch. The entrepreneur will evaluate the risk of starting from scratch and compare that to a business presented by a business broker. The startup costs for a new business are substantial, especially for franchises and their is no guarantee that you will be successful. Purchasing an existing business, on the other hand, you are assured cash flow from day one. It is always a good idea to purchase an existing business over a startup unless you have enough cash to last a few years w/o taking income. You might not need to use it all but the more cash you have in reserve, the better.

The Process

As a business buyer, you have many business models to choose from. You should narrow down the field from any business to just the ones you might be interested in. Previous life experiences will help you decide if you should be in the service industry, professional, trades, retail, distribution, or manufacturing for example.

1. 1. Interests and Experience
      Your first objective is to identify what business you are most likely able to succeed in. Your previous experience and interests will dictate which industry is best for you.

1. 1. Life Issues
      When we own a business, our immediate family is usually impacted. There are time constraints when the business has to have your undivided attention for certain days during the week or weekend, when an employee calls out sick, etc. Your family has to buy into the issues and understand this is how you make a living and pay for their food, housing, education, etc.

1. 1. How much Cash do you have to risk
      It is not only the cash investment but the ongoing living expenses that you have to consider. If the cash flow is low in the beginning or if a new competitor comes into the market, you might have to suck it up for a while until you build back up again.

1. Reasons for the Sale
   Why would anyone sell a profitable business? You must find out why and make sure the reason is valid. Business owners frequently sell profitable businesses for good reasons. You’ll want to know the reason.

Advantages vs Disadvantages

There are many more advantages of purchasing an existing business. Immediate cash flow is one of the best especially if you have no other alternative income stream to cover living expenses. The brand is already established, tax returns are available for lenders to review, employees are in place, employee manuals/procedures are all set, supplier contracts are already in place. There is Great value in this turnkey option vs overcoming all those hurdles in a short amount of time. Starting from scratch can take a year of hit and miss researching and trials and errors until you get it right.

Due Diligence

Before you sign an agreement to purchase, you will want to do your due diligence on the business. This involves many aspects of the business that you can or can not control. You must know these pretty much inside and out.

• Internal Critical Items Internal operations like the staff, the cleanliness of the shop, layout of the store (merchandising), presentation of inventory. These items are important to the operation of the business and the comfort of the patrons. Be sure you understand how and why these things work or don’t work and what needs to be changed.
• Licenses & Permits There can be a variety of licenses require depending on the business. There are lottery license, liquor license, occupancy and use license, tobacco license, health dept license. Make sure you understand the licensing process which can be county, state, or federal.
• Zoning Requirements Businesses must operate in a location zoned for commercial activities. Your township will have a Master Plan and Zoning Map that you can obtain for free.
• Environmental Issues Some businesses that you might not expect fall under one or more environmental agencies. This is especially true for food service and the recycling of frying oil in large quantities or distribution companies where cleaning liquids are stored in large quantities or 50 gallon drums.
• External Critical Items Once the internal issues are solved, external issues are even more important. Research the industry is required. Is the industry growing or shrinking, is the location conducive to the clientele, are the products relevant to the customers and are they of sufficient quality. What about the competition? Where are they located and how much market share do they have vs what the prospective business has.As one can see, purchasing a business is not for the faint of heart. You will want to rely on professionals who’ve have done this many times before.