Many dream of owning their own business because they want to be their “own boss” or to have control over the hours they work. Others become business owners in order to create a legacy or to leave their life’s work to their heirs. Two of the most compelling reasons for owning your own business are job security and the building of equity. No matter how many years you work in a corporate career, at the end of your employment you will receive no payout for your life’s work. Additionally, individuals are increasingly worried about their job security in the present day where company-employee loyalties are at a historical low.
Starting a New Business Versus Purchasing an Existing One
Many individuals vacillate between starting their own business and buying an existing one. The advantages of purchasing an existing business usually include:
- An existing customer base
- Immediate cash flow
- Established Vendor relationships
- Established inventory
- Established location that conforms to your purpose
- Negotiating the optimum price and terms
- Trained employees
Additionally, 4 out of 5 new businesses fail in their first 10 years of existence. New businesses also require a long lead time to reach profitability and a significant amount of time to build the infrastructure and business system. In short, if proper due-diligence is done through the purchasing process, buying a business is far less risky than starting a new entity.
What to Look for When Purchasing a Business
Two of the most important criteria buyers look at when purchasing a business are cash flow and overall price of the business. Most buyers already have in mind how much money they want to make at the end of the day. Other important factors include the growth potential of the business, customer concentration, flexible terms, barriers to entry, and the skills necessary to operate the business successfully. Although all of these are important elements when buying a business, one of the most often overlooked elements is finding a business that matches your personality, likes and lifestyle.
The Process of Buying a Business
There are many steps to purchasing a business. The first step is to complete a buyer profile which includes all of the elements necessary to initiate a business search for a particular individual or entity. The next step is to engage in a search for a business that meets the buyer’s criteria. Once a suitable business has been identified, confidentiality agreements are signed and data is released to the buyer. A meeting with the seller is arranged along with the tour of the business.
When a buyer recognizes a business that they have the desire and means to acquire, an offer is presented subject to contingencies. Contingencies can include lease assignments, verification of books and records, loan approvals, franchisor approvals, or any other items necessary for the buyer to successfully operate the business.
When the contingencies are removed from the agreement, the transaction moves to a closing where all appropriate documents are signed and the assets transfer ownership from the seller to the buyer.
The Role of the Intermediary
- Educates both parties through the process
- Identifies businesses for sale that are unknown in the public arena
- Provides market data and field experience in order to determine if the target business is correctly priced.
- Aids in the negotiation of crucial elements thereby protecting the relationship of the buyer and seller.
- Facilitates the transaction process and orchestrates the entire transaction between all appropriate parties such as attorneys, landlords, and accountants.
In a survey conducted by Smith Bucklin and Associates, it was found that the use of an intermediary identified committed sellers over 90% of the time, made negotiations easier 80% of the time, closed deals faster in 60% of the cases and reduced buyer stress significantly in over half the cases.