Starting a new business and growing it from nothing is tremendously gratifying, albeit demanding and difficult at times. The alternative - buying an existing business - often doesn’t get the consideration that it deserves. And that’s unfortunate, because buying a business is usually a sound investment...providing you’ve done your homework. The business is established. Customers know and trust it. Supply lines and distribution networks (if necessary) are already in place. It’s a turnkey option for becoming a business owner without much (though not all) of the hard work involved in starting something from nothing.
Buying an existing business, regardless of where you are, is fairly similar. Some of the legalities might differ (relating to licenses, permits, and tax registrations), so be sure you understand your legal responsibilities depending on where you live.
But the basic steps involved, and general good advice, is the same whether you’re in Canada, the US, Australia, Germany, the UK, or wherever. And to do it, you’ll want to have a “team” on your side, each with their own specialization.
If you’re interested in a franchise, check out “How to Buy an Existing Franchise”.
Find a Business
Finding a business, like finding a used car, sofa, or boat, can start with the classified ads in a local newspaper, their online portal, or a third-party online forum. Look under or search for “businesses for sale”, “business opportunities”, or something equivalent. Owners will often list the same way they would for any other item.
Additionally, if there’s a particular business you have your eye on, there’s nothing wrong with speaking with the owner, even if the business isn’t listed for sale anywhere. People do it with houses all the time. Meet with the owner, and simply ask whether they would be interested in selling. They may politely decline, but they just might want to talk about it further.
Finally, you may want to use the services of a business broker. They operate similar to a real estate agent, only you’re buying a business instead of property. They assist business owners to sell their business, and/or interested parties in finding and purchasing a business. They have the knowledge and expertise to get everything done smoothly, properly, and quickly. You can search for brokers in your corner of the globe using the keywords “business brokers [city, state, or province]”. Be aware that they do receive payment (a percent of the final sale) for their services.
Examine the Business
Once you’ve found a suitable business for sale, it’s time to conduct a thorough examination. You want to look at and consider everything in minute detail. To be completely covered, you’ll likely want to include your accountant, banker, and lawyer at this stage (or hire one if you don’t have one yet).
Ask to see financial records for at LEAST the past five years (although ten or more is even better). How’s the business doing? Is it growing, or declining? Does it have any outstanding debt? What’s the gross revenue in a typical month? Typical year? Have your accountant look through these records with an educated eye. And if a business can’t provide detailed financial and tax records for at least five years, run. Run away. Very fast.
Consider the industry as a whole: is it on an upswing? What can you reasonably assume about potential growth over the long-term?
If the business is incorporated, you need to see those documents as well (share them with your lawyer). Is the business incorporated in the province/state where it is located, of at the federal level?
Talk to EVERYONE connected with the business, including employees (are they happy? Is the business successful in their opinion?), customers (gauge loyalty and reasons why they frequent that business), partners (if any), and suppliers (are there any outstanding amounts owing? Is the supply chain reliable?). You want to get the complete picture, and not just from the owner looking to sell. Ask the owner why they are looking to sell...their answer might be revealing.
Look into trademarks, patents, facilities (does the current facility pass inspection?)...anything and everything connected to the business.
Decide on a Price
This is obviously the tricky part. Placing a dollar value on an existing business isn’t an exact science, and there are many different ways that people do it. Obviously, a business broker (if you use one) should have some insight to average industry prices and trends, but don’t take their opinion as law. Do your own research, too. It’s a negotiation, after all, just like buying a house. They have an asking price, and you can make an offer, to which they will likely make a counteroffer, and so on.
But how to come up with that initial amount? There are several popular methods, including:
· Book Value Method
· Cash Flow Method
· Capitalized Earning Approach
· Industry Multiplier Method
· Excess Earning Method
· Discounted Cash Flow Method
None of these are perfect, or precise, but should give you (or even better, your banker and accountant) some indication of a business’s ballpark value.
Once you and the business owner come to an agreement as to price, the final step is getting the lawyers, and bankers, to hammer out the details. Take your time to do it right...permits, licenses, transfer or ownerships, and on and on and on. Do make sure you are doing everything you need to do for your country or specific state or province. The steps listed here get you to the final stretch. The last 100 meters is up to you, as the rules and terrain may differ slightly. But when you cross that finish line, you’re the proud owner of a business already bringing in revenue. That’s when the fun (i.e. hard work) really starts.