Buying an existing business is an attractive option for aspiring business owners because they can avoid startup pains. However, the process can be complicated with various risks involved. Here’s what you should consider when buying a business.
Type of business
The most common business entities are partnerships, sole proprietors, corporations, S corporations, and limited liability companies (LLCs). The type of business entity you purchase will determine the taxes and legal liabilities you will be responsible for.
An unincorporated business with a single owner is defined as a sole proprietor. When you have two or more people contributing funds, labor, or property to the ownership of a business and sharing in the losses or gains, then it is a partnership. A corporation has dedicated shareholders who provide property or money in exchange for the company’s capital stock. S corporations pass the company losses or income to their shareholders, who claim the gains or losses on their personal taxes. LLCs are limited by state statutes and require verifying if allowed by your state.
[Read more: What to Look for in a Business Partner]
Reputation
Exploring the existing business’s reputation and why the company is for sale is an important step. It can be challenging to reverse a company’s negative brand reputation. Additionally, a business with broken or outdated equipment can present its own set of problems. Speak with the owner, surrounding businesses, and, if possible, existing employees and vendors of the business.
Doing your research can help mitigate potential issues as much as possible. On the flip side, an existing business with a good location and outstanding reputation can allow you to skip timely steps and increase your odds of successful ownership.
Existing employees
The business’s existing employees can be invaluable. They can provide a pulse on the company and help you understand how the company currently operates, saving you valuable time and stress. Having a staff already in place can also expedite the turnaround of profitable cash flow on your newly obtained business.
When buying a business with existing employees, understand how the company hiring works and how the employees presently rank. Consider how you will manage them, what their schedules are, and how you will train and onboard new employees. Weigh the cost to your business of hiring, onboarding, and training new staff against the cost of retaining the current staff.
The No. 1 consideration if you are thinking of buying a business is exactly what are you buying — assets versus stocks.
Karla Dennis, Founder and CEO of Karla Dennis and Associates, Inc.
Legal considerations
There are many legal considerations when buying and running a business, including confidentiality, non-disclosure agreements, and non-compete agreements for employees. Exclusivity agreements protect the business buyer by preventing the business seller from negotiating with anyone else while the buyer is working on an agreement. A business purchase agreement gets drafted and signed by both the buyer and the seller and outlines the details of the sale.
There are many other legal documents to review, consider, and sign when buying and running a business. Consult with a business attorney throughout the process to ensure compliance.
[Read more: How to Choose a Legal Entity for Your Startup]
Market valuation
Market value is how much a business is estimated to be worth in the financial market. When eyeing a business for purchase, review its worth and financial health. Market value provides a peek into the stability and potential of the business.
Many factors go into determining a company’s market value, and they can be expressed as mathematical ratios or measured by tangible and intangible assets and the income of the business. The market value is a reflection of the financial health of the business, so you can get an idea of if the business is struggling or thriving.
Assets and liabilities
Understand the liabilities of any business you consider purchasing, including all debts and obligations the business is responsible for. Once you know those liabilities, you can determine how manageable they are.
A liability can be owed now or in the future, can be classified as current or noncurrent, and might be listed on the business balance sheet. The ratio of liability to income and assets is a key factor in determining a company’s financial health. If the ratio of liability to assets and income is too high, the business might not be the right fit for you.
“The No. 1 consideration if you are thinking of buying a business is exactly what are you buying — assets versus stocks,” said Karla Dennis, Founder and CEO of Karla Dennis and Associates. “As a buyer, [I would] want to purchase assets so I can depreciate them and garner a nice tax write-off. I am looking to safeguard my future tax bill.”
[Read more: Commercial General Liability Insurance Guide]
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