Buying a small business: buying process and financing – Natural Self Esteem

Do you dream of owning your own business? There is more than one way to make this dream come true. Some entrepreneurs start a business from scratch while others buy an existing business.

There are certainly advantages to buying an already established business… but is it the right move for you? let’s find out

Pros and cons of buying an established company

If the idea of ​​starting a new business isn’t your thing, you might consider becoming the new owner of an existing business. Let’s look at the pros and cons.

advantages

An established business has already done the hard work of getting established, acquiring customers, and generating revenue, leaving you with less work to get started. Contrast this to starting a startup, which requires a lot of upfront capital as well as a lot of strategy and planning to be successful.

Another advantage is that you have a clear understanding of what kind of earnings you can expect. Smart business buyers ask existing owners to look at their accounts. A look at the company’s financial statements, such as Financial statements such as cash flow statements and income statements can help you see how financially healthy the company is.

disadvantage

On the other hand, you may not be able to find the type of business you are interested in for sale or at a price you can afford.

You can also inherit liabilities like debt from the current owner, which can increase the cost of buying a business. And you may not realize any issues with staff, suppliers, or location until you take ownership and see for yourself.

Think about why this person is selling the company. Is it because it’s flailing and they want to get out before the ship sinks? You don’t want to be the one who goes down with the ship!

What you should consider before buying a company

When considering buying a business, there are a few things to keep in mind.

What’s the real story?

Again, it’s important to consider why small business owners are selling their businesses. If they’re planning to retire, that’s one thing. But if they’re in debt and can’t afford to run the business, then that becomes your problem.

Do your due diligence to find out as much as you can about the deal. Don’t just look at the balance sheet; Also, talk to employees to learn how they like the company and how it is run. Examine the equipment to see what form it is in.

What will it cost?

The purchase price is just one expense you have when buying an existing business. If the equipment is outdated, you may soon need to replace it. And keep in mind that some employees may leave if you take over the company, so you may have to invest in hiring new employees.

Also consider other fees or licenses that you may need to transfer or obtain under your name as a new license. Check the business licensing requirements in your state so you know these costs up front and can ensure you have the cash flow to cover all of these expenses.

Is there debt?

If the company has any outstanding loans or other liabilities, what are they and are you responsible for paying them back? You may be able to negotiate this as part of the purchase agreement so you don’t get saddled with another company’s debt, which could start you off on the wrong foot when building business credit.

What work needs to be done?

You may be able to come into this business as a turnkey operation and do nothing more than write your name on your office door…or you may need to do major renovations, hiring, training, or shopping. View your new property as an opportunity to make design improvements if the site you are purchasing is dilapidated or in need of a coat of paint. A few cosmetic tweaks can let customers know there’s a new owner in town who’s keen to serve them well.

Do you need help?

You can certainly buy a new business on your own, but hiring a business broker can help. Business brokers know how to find the type of deal you are looking for and they can help you with the due diligence and negotiation process.

How to buy an existing business

Now let’s look at the steps to buying a business.

Step 1: Do your due diligence

It is your responsibility to learn as much as you can about this business. That means carefully analyzing financial records (or hiring an auditor if you’re not sure what they’re telling you about the company’s financial health), examining all assets, including intellectual property, and being aware of all liabilities .

Also, check the company’s credit history as this is what you will inherit. If the owner has not paid bills on time, this will reflect on the company’s creditworthiness and may affect your ability to secure financing later.

Step 2: Review the business plan

They want to know as much as possible about business operations. So if the company has a business plan, ask to see it. This can give you a glimpse of the previous owner’s vision for the business and how well it aligns with the current state of the business.

Step 3: Conduct a business valuation

The owner will have given you the selling price, but now it’s up to you to do a business valuation to see how closely that price matches the market value of the business. A business valuation should include both tangible and intangible assets, including real estate, monthly deductions and accounts receivable, and debt.

A business broker or accountant can help you with these calculations. Ultimately, you’re trying to determine if, at the asking price, you can achieve a solid return on investment within a few years.

Step 4: Submit your letter of intent

This is a letter which you suspect states your intent to buy the company, although you can opt out if you later decide it’s not the right company for you. Some business owners won’t give you tax returns and other financial information until you give them your letter of intent.

Step 5: Put your financing together

We’ll cover this in more detail in the next section, but before you can buy a business, you need to make sure you have enough to cover not only the selling price, but the other costs you’ll be charging as well. If you don’t have cash on hand, you may need to take out a small business loan.

Step 6: Sign on the dotted line

Now comes the reward! They sign the necessary legal documents to seal the deal. Once both parties have signed, the deal is yours!

Financing options for the purchase of a company

If you don’t have the working capital you need to cover the value of the business and other start-up costs, consider these financing options.

term loan

Banks and online lenders are willing to fund a business acquisition if you qualify. You generally need good to excellent credit to get the low interest rates that banks are offering. Consider these lenders for term loan options:

SBA loan

Another small business loan option is a loan secured by the Small Business Administration. These loans also offer low interest rates for those who qualify. Here’s a lender to consider:

Vendor Financing

Some sellers, particularly those who are motivated to sell, may be willing to fund the business themselves. If you don’t qualify for a soft loan, this can be a good option. You may be asked to pay a deposit based on the asking price and then make monthly payments for a set period of time.

Find the company that suits you

Finding the right company that fits your needs and fulfills your dream will take time, but if you do your due diligence, you have the potential to build on an established company with your own unique flair.

This article was originally written on March 17, 2022.

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