Benefits of Purchasing an Existing Business
It is generally less risky and more profitable to purchase an existing business than attempting to start a new enterprise. Approximately 50% of new businesses fail within their fledgling year. This could be attributed to a variety of factors including poor research, unverified theories, lack of working funds and poor management.
There are many advantages in acquiring an established business. These include:
An established business will have comprehensive financial documentation, allowing you to estimate the company’s future growth potential based on past performance. Access to the business’ past financial records, tax returns, profit and loss statements as well as any other important financial data can help you determine if this business has a profitable future.
The amount of working capital required is often less in an established business due to the existing cash flow being generated. People starting new businesses often underestimate the amount of capital required to start the venture and to cover any unforeseen contingencies.
An existing business is usually accompanied by an experienced and skilled workforce who are familiar with the operations of the business and its customers and suppliers.
Gaining an established customer base is a considerable saving in both time and expense that a new venture faces in attracting an adequate number of customers to support the overheads of a new operation.
Licenses, Certificates, Permits, Leases etc are often transferable and represent a considerable saving in time and costs associated with providing information and conforming to statutory regulations when applying for them in a new venture.
Sources of finance to purchase existing businesses are more readily available than the venture capital required for a new enterprise. Banks and other financial institutions prefer to lend money for businesses with a proven track record.
Buying a business is a major investment and should be approached in a systematic
and organized fashion. The key to success is in utilizing the services of trained professionals at every step of the process. Friends and well-meaning relatives are not usually qualified to provide the specialized advice needed for a business acquisition.
Who Can Assist?
Use the services of a professional Business Broker who is experienced in coordinating the sequence of events necessary in purchasing a business. A Full Service Business Brokerage will present businesses that have been thoroughly screened and that have provided all of the information necessary to compile a comprehensive Business Information Profile which can be matched to your specific search criteria.
Engage an accountant to assist in the due diligence process and to advise you in matters of taxation, record-keeping, formation of the most suitable purchasing entity and other financial considerations.
Obtain legal advice for assistance with the documentation, searches and any statutory compliances necessary in the transaction.
When you meet with a Business Broker be prepared to discuss your background, your work or previous business experience and your financial ability to purchase a business. This will greatly assist the broker in helping you to find a business that fulfils your needs.
You will need to prepare a personal resume and financial statement which will be required by lending institutions, landlords or franchisors who may form a part of the purchase process.
Define Your Acquisition Criteria
- What business categories are of the most interest to you: Service – Retail Food Wholesale / Distribution – Manufacturing – Other?
- Is there a specific business you are interested In purchasing?
- Are there any categories of industry you are definitely not interested in?
- What income do you need to achieve to maintain or improve your lifestyle?
- What preference do you .have in terms of geographical location?
- Are you buying a business for immigration purposes, if so what criteria applies?
- What are you prepared to spend if the “right business” comes along?
- When do you expect to be in your new business?
Review of Businesses for Sale
After signing a Confidentiality Agreement, which is required by most business owners, you will be presented with a list of businesses that match your search criteria. Business Information Profiles may now be reviewed with the broker and preliminary questions answered.
After reviewing the information in the profile and determining which business you believe best meets your investment criteria the Business Broker can arrange an inspection of the business at a time that is mutually agreeable to all parties.
The broker will also attend the inspection to introduce you to the business owner and facilitate the flow of information and provide guidance with regards to the next step in the process.
Remember all of the information you obtain about the business is strictly Confidential. Only discuss this information with your
professional advisers and partners, reminding them also of the confidentiality of the material.
In most cases the employees, customers, suppliers, landlords and lenders of the business may not be aware that it is for sale. Premature disclosure may have a damaging effect on the business being sold for which the vendor could have recourse against you under the terms of the Confidentiality Agreement you have signed.
Offer to Purchase
At this point you have reviewed the information and financial summaries of the business and you have met with the owners and toured their business facilities. You may have involved your accountant and solicitor in the review of the information provided so far. If you are satisfied that this business meets all of your criteria this is the time to make a formal offer of purchase. The offer can be presented on a form provided by the broker called a Proposal to Purchase.
This form provides you with the opportunity to specify the conditions you require to be met during the Contract Phase, for example: a due diligence inspection to verify the financial information, a finance clause to allow you time to organize a loan, acceptance by the landlord or franchisor, a health inspection performed at the premises in the case of a food business etc.
If the offer and conditions on the proposal form are agreed to by the vendor then a formal Contract is entered into and a deposit is paid and held in the Business Brokerage’s Trust Account. A Contract takes the business off the market, allowing you the time you need to prove the figures, meet the landlord, and talk to your bank manager without the threat of another purchaser snatching the business away from you during this time.
During the Contract Phase you may expect to receive copies of tax returns and other business documents. At this time it will also be appropriate to be allowed access to the landlord or his agents, the franchisor, the employees, (at the vendors discretion) and perhaps, in certain types of businesses, key customers or suppliers towards the final stages of the Contract process.
The Business Broker will coordinate the expedient flow of information between the principals and their advisors, landlord, finance broker, franchisor and others to ensure a smooth passage and the resolution of all issues prior to the settlement day.