Managing a business is one way to put your entrepreneurial skills to the test. But what if you don’t want to start from the ground up? If your interests lie more in the running of a business than the building of one, buying a small business can be a great option.
Advantages of Buying a Small Business
When you start a business from scratch, you spend a great deal of time creating your empire. You must choose or design products, find manufacturing, set up physical operations, and build a customer base.
When you buy an existing company, all of those steps are taken care of for you. Depending on the business, this can mean less groundwork and lower risk. Although you may need to spend more money up front, you can probably expect cash flow right out of the gate. A startup, on the other hand, can take years before it turns a profit. What’s more, with an established business, since you can check into the financials before the sale, you can verify that the company has a viable market and a lucrative future.
Choosing a Business Type
Buying and operating a company puts an automatic demand on your time and money. The right fit increases your job satisfaction and your chances of success. To start, you might consider purchasing a company that matches your industry experience. If you spent 10 years working in advertising, you probably have plenty of wisdom to bring to an ad agency.
It’s also a good idea to select a business model that suits your needs. If your dream is to travel around the world while you work, an online business can be the perfect solution. You might also consider the location of the company and see whether its production schedule and operating hours fit into your lifestyle. When you have young children, a company that requires you to be on call 24 hours a day might not be the best fit.
Searching for Businesses for Sale
Once you have an idea of what you want, you can start looking for companies for sale. Your professional network is often the best place to start buying a business. A few quick calls and emails to your past colleagues, vendors, and former bosses can dredge up some exciting leads. Suppliers, in particular, can be valuable resources. Since they interact with many business owners in your industry, they’re often privy to the latest news. Even if your contacts don’t know of anything at the moment, they’ll think of you when an opportunity arises.
Other places to search for businesses for sale include:
- Online business broker marketplaces, which are particularly useful for internet-based companies
- Newspaper classifieds
- Magazines and journals in your industry
- Accountants and lawyers
Digging Into the Financials
Once you have a short list of companies you might like to buy, it’s time to dig into the finances of each one. An accountant can be a big help in this process. Although you probably don’t have access to the company’s books at this point, the accountant can check the pricing structure, and search for any liens or audits on the company. They can also see if your finances can bear the purchase price, taxes, fees, and other charges related to the purchase.
Researching the Company
If your initial financial research turns out well, you can start looking into the company and the market. Competitors are a great place to start. How many are there? How saturated is the market? Is there opportunity to increase the market share?
It’s also a good idea to get to know the customer base to find out why they patronize the business, and whether they’ll continue to do so if it changes ownership. During this process, you can identify opportunities to better serve customers or bring in more buyers.
After you’ve chosen a business and made an initial agreement with the owner, you’re usually given access to the company’s financial records. This allows for due diligence. During this period, you and your accountant examine every aspect of the books. You can check sales, see how the company manages inventory, and examine any equipment or materials included in the sale.
The goal of due diligence is to determine the value of the company you’re buying. You can also pinpoint any risks associated with the sale. If the factory equipment is old and in need of repair, for example, you may be looking at a big investment in the near future. This business valuation tells you if it’s worth the purchase price.
Financing and Buying the Business
You’ve found a business, determined it’s a good value, and agreed on a price with the owner. Once you’re done raising capital, it might seem like the work is over, but often, it’s at this point the process slows down. You must sign papers with the bank and the owner. Then, you need to change the ownership details on the company’s official incorporation documents and GST registration. For the comfort of you and the business’ existing employees, it’s a good idea to plan plenty of time to make this transition.
There are plenty of legal and financial hoops to jump through in the process of buying a business, but if you’re prepared, the process can go off without a hitch. At the end of the tunnel, you have a fully functioning business that’s ready for growth and profits.