Buying a Business

Buying a Business

Many would be entrepreneurs consider purchasing an existing business as a less risky option than starting one from scratch. Research shows that most businesses fail within the first three years of operation.  Some feel that buying a business may lessen the risk involved.

Why buy a business? Why not start a new one?

Starting a business can be tough and time consuming; you don’t know who your target customers are, how many staff you will need; you have no idea whether or not the business will be successful. On the contrary, when you purchase an established business all the hard work has already done for you.

There are many advantages as well as disadvantages associated with the acquisition of an existing business.  Some of them are:

Benefits of buying an existing business

• Less risk of failure
• Established solid customer relationship
• Verified business methods and concepts
• Qualified and experienced employees
• Proven cash flow
• Established suppliers
• Set up location
• Goodwill included with the business
• Lenders are more willing to finance to an existing business

Disadvantages associated with buying an existing business

• Some staffing problems – resignations of current employees due to resentment of change to a new owner and even shoulder staff entitlements
• Customers lack of faith in a new owner
• Good will acquisition may be too high
• Outdated and defective plant and equipment

So, ponder on these pros and cons laid out for you before deciding to purchase an existing business.

How to find the right business for you

- Look into the past performance, current status, operations – investigate historical performance, its operations which would include sales, costs, expenses, existing liabilities, profits as well as assets.
- Workforce and management
- Competitors
- Queries – Asking about the business from its present owners and existing customers is a must.

Gathering all the information mentioned above will help you decide on the right business to acquire. The broker will give more accurate information. If it is possible, ask for externally prepared financial statements which show the status of the company being acquired and also request income tax returns, bank account statements and other information that will guide you on your decision. Success goes with recognition of the right business for you.

Determine the business that best suits you

You should decide what kind of business you want to be involved in.  And, as much as possible, choose something that you are good in. For example, if your specialty is food then venture into a line of business that will permit you to do that. Here are some points to help you out:

- Evaluate the knowledge, skills and experience that you currently possess
- Choose an industry that you are familiar with and understand well
- Identify your strengths and how you can contribute to the business
- Identify your weaknesses and how to handle them

Purchase Price

Some people get the wrong impression that acquisition of an existing business would cost more; indeed more often it is less expensive compared to starting a new one. The purchase price of a particular business is allocated to goodwill, leasehold improvement, plant, and equipment. Allocation of the purchase price can have a huge effect on the buyer and seller, wherein it may result in an increase or decrease on the seller’s gain on sale as well as the future taxable income of the buyer following the year of sale.

Allocation of which can lead to tax consequences and that is why there is a need for a buyer and seller to consult with a financial and tax specialist with regards to the purchase and sale of the business or trade, price allocation and other information involved in the transaction.

Innovation and creativity will still take part even though the business is already established. With these you are able to bring in new ideas, putting your skills and experience to good use. Enhancing and improving it which would consequently heighten the possibility of increased profitability.