Buying a Business: What You Need to Know

Benefits of Buying an Existing Business

Finding financing to start a new business can be a complex process, and it may be difficult to find backers who are willing to take the risk. However, when considering a business that is already established, a person can take financial records to potential stockholders, lenders and other sources of funding, which may be much more influential.

The equipment, building and other setup considerations are typically part of the deal when a person sells a company. For the buyer, this saves money and time. Perhaps even more beneficial than the location details are the systems and contacts. A new business owner who can step into the shoes of the past owner may receive a full complement of allies, including established clients, customers, employees and suppliers.

Information a Buyer Should Receive

A potential buyer should research the status of the company under the current ownership, and this involves carefully scrutinizing a number of documents. For example, financial information can be gleaned from the income taxes of the past several years, including trends and other factors. Balance sheets should also be evaluated in detail.

Some expenditures are not necessarily passed from owner to owner. When reviewing the required licenses and permits, the buyer should beware of a factor known as ‘grandfathering.’ The company’s original costs for these may have been incurred at a time when the laws were different. Changes in the law are sometimes not enforced for those who are already established. They may be grandfathered in. The new owner is typically responsible for updating licenses and permits, though, so getting the business up to compliance may have financial repercussions.

Other details a buyer should examine include the organizational chart and operations as well as the articles of incorporation, bylaws and shareholder agreements. Employee documentation should include employment contracts, job titles and salaries. The seller should also provide information about the customer and client bases, competition and marketing data.

Many states have disclosure laws that require a pre-sale document to be filed with the state and given to the buyer. The primary goal of this obligation is to prevent fraud by ensuring that the seller is not hiding important information.

Process of Buying a Business

The strategy for traveling from researching the type of business the prospective owner would like to buy to the closing date should follow a pattern. The first phase includes identifying the type of business that the entrepreneur is best qualified to run. For example, a restaurant may not be the best option for a person with a skill such as welding.

The second step, locating the chosen field of business for sale, may be a much more time-consuming task. A business broker or attorney may be able to expedite this process, and information may also be found in trade publications.

Once these have been narrowed down to one or two options, they should be investigated thoroughly. This phase of research is called due diligence, and experts recommend that this process only be initiated once the buyer is serious about a purchase. During due diligence, the seller typically takes the business off the market, so buyers usually provide earnest money to demonstrate their seriousness about the transaction.

The final stage in the process, closing, includes drafting, approving, transferring or signing documents such as leases, notes and security agreements, closing statements and a bill of sale, among others. The buyer and seller then set a closing date, and the money is exchanged.

Buying a Franchise

Choosing a franchise over an independent business is an appealing option for many because of the brand recognition and other support often provided by the franchisor. The level of interaction between the franchisor and franchisee varies depending on the company, but assistance with training, marketing and products may be included. While this backing may be appealing, franchisees should be aware that they may not have the same level of freedom to make their own business decisions.

Even though a franchise seems to be successful, the research should be just as thorough as with any other business. Franchise laws require certain financial information to be provided, but it is still necessary to dig deeper. Buyers should talk to current franchisees about their experiences as well as any former franchisees who were not successful or left the business for some other reason.

It is impossible to receive a guarantee for success, but thorough preparation can reduce the risk of failure.