Things To Remember When Buying Existing Businesses
Those who plan to be entrepreneurs should consider buying an existing business from owners looking to liquidate, instead of starting from scratch. Being the one to give birth to an enterprise may be more thrilling than buying an ongoing business, but would you rather fatten your ego or your wallet?
There are plus factors in purchasing an existing one: your market is already established and many operational problems have already been resolved. Usually, too, you can get a much lower price as the owner is eager to sell.
But there are also risks. Due diligence must be done to improve your chances of owning your dream business. Here are some of the most important things to take into account:
Check if there are future developments that would negatively impact the business. This advice can only be carried out partially because there is no way you can possibly check on every potential eventuality. Nevertheless, there are several critical scenarios that you should watch out for, many of which depend on the type of business. For example, for retail ventures, you should see if there would be something that would affect traffic to the store like new roads or competitors that would divert your buyers.
Have the owner mentor you until you learn the ropes. One of the best arrangements is if the owner is willing to spend a substantial time training you on the business. This is especially true if it needs special technical know-how to operate, like an offset printing press.
Check if customers will remain with you after the sale. There are many reasons why customers will leave with a change in ownership. For example, the customer may be a relative or friend of the owner and may not want to deal with another person.
Inspect the quality of the assets and the premises. The actual value of the assets may be far lower than what’s seen in the books. Inventory, equipment and facilities may be so dilapidated and outmoded that their value is vastly less than in the records.
Know if key employees will remain. There are some companies who would not be profitable were it not for the presence of a few key employees. For many companies, it may be their top sales people who are the most crucial to retain. In software companies, it may be a star programmer.
Buy the assets, not the company. If the company is a corporation, it would be far safer if you buy the assets and not the shares of the company. This is to minimize the liabilities that may be evident only after you have bought the company.
Do not violate the Bulk Sales Law. Even if you buy just the assets of the company, there are cases where liabilities may come with the purchase. The Bulk Sales Law is intended to protect creditors from debtors who may try to evade their liabilities by selling certain types of assets in bulk. Usually this applies to retailers, wholesalers or traders who have trade inventory. Learn more about this law.
Check that sales and profits are not overstated. Take care that you arrive at a reasonable figure for the sales and profits. Factor in seasonal aspects. Many businesses have strong sales only during the Christmas season and then languish for the rest of the year. Check the figures and their accuracy for the past five years if possible.
Have a non-compete contract with the seller. To make sure that the seller would not become your competitor, do not rely on verbal assurances. With the help of a lawyer, try to secure the longest possible non-compete period. This means that for a certain period of time, they are not allowed to do anything that would compete with the company that he is selling.
Do a thorough financial statement analysis. Financial statements would be more understandable after you have already seen the actual assets and liabilities. It is best to look at the financial statements at the start and again at the end of your assessment. View the financial statements from the perspective of an investor and not a lender. You should be more concerned with the future sales and profit growth potential rather than the liquidity ratios.
*Originally published by the Manila Bulletin. CC-4, Sunday, March 16, 2014. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.