Starting a brand new business usually comes with several challenges. Sometimes, some of these challenges are automatically eliminated, or at least severely reduced the moment you opt to buy (into) an existing business instead of starting a new one.
Some of the more obvious advantages that buying an existing business has over establishing a new one include things like inheriting an existing revenue stream and financial history, inheriting an existing customer base, experienced staff, equipment, stock, suppliers and more.
What is more, the much-publicized statistics about the high failure rates of small businesses might not apply to the business as it may have survived and outlived its infancy, a stage where many new businesses never make it past. This fact alone can potentially outweigh all other potential disadvantages that come with buying an existing business.
Having said that, buying an established business is usually not as simple as it sounds. There is or should be a lot of preparatory work that goes into it.
Referring to things like independently verifying, where possible, all the information that the seller provides about the business, finding out as much information as you can about the seller and their reason for selling, researching the business and the environment in which it operates and much more.
A list of five important things to consider doing before buying a business include:
1. Register a New Company
Before buying an existing business, one thing you might want to consider doing is forming a new company of your own. One good option in this regard is creating an LLC, which gives you more flexibility and other benefits than a corporation does, or even a sole proprietorship, especially if there will be less than 10 members or owners of the LLC.
These flexibilities and advantages include things like the pass-through taxation, wherein the profits and losses of the LLC are “passed through” to the personal income tax of the members, and consequently, the LLC as a business entity is not taxed, thereby eliminating double taxation. There are also things like lower state filing fees, less paperwork and more.
The thinking behind this is to use your own company to buy over the assets of the existing company, instead of the shares of the company, so as to ensure that any “baggage” that the company might have, in terms of debts or liability, or even a bad business image, does not get transferred to you when you take over.
There is however the flip side of this coin where the existing company might have built up a good and reputable brand that might be more favorable to you as the new owner instead of trying to build a new one from scratch. It is for this exact reason that mention was previously made about the need to do your due diligence on the business to be bought.
2. Speak to a Business Lawyer
It is very likely that you will not be able to go through the entire process of purchasing the business without seeking professional help of some sort, particularly legal help from a good business attorney.
From reviewing various documents related to the business sale like the letter of intent, purchase agreement, non-disclosure or non-compete agreement, current lease documents (and the new one to be signed with the landlord;) to reviewing the financial statements, ratios and trends of the business and any existing contracts the business might have with third parties.
The list of things for which a lawyer will be needed goes on and on. A good lawyer will also be sure to include a strong “hold harmless” or “indemnify” clause to protect you from liabilities that the seller may or may not be aware that they are passing on to you.
3. The Brand
As previously mentioned, the seller of the business might have put a lot of work into building a good brand, either for the company itself or for its specific products or services. In such a situation it may be a good idea to continue to ride the wave and benefit from the good work that has been put into the business, instead of starting afresh.
On the other hand, the company might have a very bad reputation regarding things like customer service, defective products or service and more.
In such situations, you likely will want to disassociate yourself from the past and start afresh, and this is where the point of registering a new company comes into play, after which you might consider a rebranding campaign.
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Thankfully, the world wide web and the existence of things like search engines, social networks and business directories make it quite easy to find out certain things about a company, including the experiences people have with using its product or service, and the reviews they leave about their experiences.
These can be invaluable in your decision on how to proceed with the business purchase. Or if to even proceed with it at all.
4. Business Revenue
One of the main advantages that an already established business should bring to the table is a history of cash flow. Of course, there might be other underlying reasons behind your wanting to buy that particular business, but the assumption will be made that any business that has been in existence for any period of time should have a history of generating revenue.
Consider that many schools of thoughts state that it can take anywhere from five to seven years for a small business to break even, though this will vary from company to company and from industry to industry.
Buying an existing business may solve this problem for you, as a brand new business will likely have no cash flow, or at least no positive cash flow for some time into the future.
This can be beneficial when it concerns things like taking a bank loan or other credit facilities for the business.
Even after the sale is concluded, you may still require the seller’s presence or input into the business for a few weeks or months to help acquaint you with several aspects of the business, including both internal processes and external ones like an introduction to customers and clients.
This is similar to an ‘after sales service’ that you would expect to get after you buy certain types of products or services. This transitional support period should not be underestimated, and to ensure that it is binding, your lawyer should include this clause in the purchase agreement
Taking the Leap
Buying an existing business with all the benefits it brings does not make it any easier to manage or run that business. It just gives you certain advantages that you might otherwise not have. It could also potentially increase your chances of success in the business.
Nevertheless, the same hard work and other ingredients that are required to make any business successful, must still be applied.