Guide to Purchasing a Business


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If you are interested in buying a business, you may consider purchasing an existing business rather than starting from scratch. There are several advantages to this approach. However, there are important things for you to understand before taking the leap into business ownership.

Advantages to Buying an Existing Business

There are a number of advantages of buying an existing business rather than opening up a completely new one. The existing business already has a built-in set of clients or customers, so you donít have to worry about trying to get the word out about your business. Additionally, you can review the financial statements supplied by the business to have a better understanding of the potential profit you may be walking into. Many small businesses fail when they do not have enough cash to get through the first few years of the business. However, when you buy an existing business, you start with many of the essentials, such as staff, a building, inventory and equipment. Upfront costs are minimized as well. You may also become the owner of intellectual property without having to go through the tedious task of producing it and having it approved.

Due Diligence

When searching for a business to purchase, it is important to conduct due diligence. It is important that you understand why the business is currently for sale and any problems that the current owner is facing because these are the problems you will be walking into. You should carefully investigate if there are any existing business debts. The business may be having problems because it is using old equipment that is not performing well, which would suggest a large upfront cost for you when you buy the business. The cost of producing inventory may be too high or there may be quality issues. The business may be suffering from location issues in which there are not enough customers who walk into the area or too many competitors in close proximity.

Review Documentation

There are a number of documents that you must carefully evaluate as part of the due diligence program. You should review the businessí balance sheet, cash flow statement and other accounting documents. Review any audits that were performed on the business. Also, review the documents that tell more about the day-to-day business, such as accounts receivable and accounts payable reports, debt statements, sales records and documents that break down various costs to the business.

Review Laws and Legal Documents

Review where the business is located and whether it complies with various laws, such as whether the business has necessary licenses and permits. Review zoning laws if there have been any changes that would potentially impact your business. Also, review relevant environmental regulations to check for any potential problems in this area, which can be expensive to correct.

Review Real Estate Contracts

Since you may be taking the business subject to existing real estate contracts, it is important that you carefully review these terms. You may have tenants on the property that you will have to take into consideration. See what the price of the rent is and how long the term is. If you will be buying a business that leases the space, review this contract to see the terms that you may be acquiring.

Look at How the Business is Organized

Since you may be buying a business with existing staff, it is important that you understand each workerís role and what he or she contributes to the business. Look at who is in a management position and whether you think this individual is best for this position. Consider if you will need to hire new staff or replace existing staff. Review employee documentation, including employment contracts, training manuals, employee handbooks, benefit plans and work policies.

Check Equipment

If equipment will make up a big part of the purchase, check its status. See how old the equipment is, whether there are any existing warranties on it, the purchase price and the potential selling price. Consider if you will need to invest in repairs within the first couple of years after purchasing the business and take this information into account when devising the purchase price.

Assess the Letter of Intent

Review the sellerís price proposal and other terms and conditions outlined in the letter of intent. Negotiate on these terms and the price.

Draft a Sales Agreement

When you have decided to purchase a business, draft a sales agreement that memorializes this agreement. At a minimum, the agreement should include the sales price and what this price includes, such as real estate, inventory, equipment, customer lists, intellectual property and the brand. The agreement is a critical component of the process and is ultimately what can be enforced. A business lawyer can assist with this process.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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