Buying an Existing Business

Purchasing an established business can lighten the burden of start-up costs, lag time without a salary, establishing markets, and other costs associated with the creation of a new business. Established businesses may have existing good will (intangible assets such as reputation or historic value).  The decision to buy a business requires careful evaluation of many factors including pricing and financing your purchase.  The potential buyer must understand their criteria for selecting, their motivation for wanting to purchase the business and the motivations of the business owners.

 Consideration should be given to the following:

• What is your experience with the industry and/or management?

• Does the business match your strengths?

• Is the business what you enjoy doing?

• Is it in a desirable location?

• What are you willing to invest?

• Can you get financing?

• What size business do you desire in terms of sales, profit and employees?

If the business under consideration has a product or service outside your area of expertise, it is important to make certain that the key employees will stay after the sale or that you can hire someone with similar experience.

Finding a Business For Sale

Finding a good business opportunity is not always easy.  Sources to consider:

• Printed advertisements

• Trade sources and suppliers

• Friends and acquaintances

• Intermediaries such as business brokers or acquisition specialists

• Real estate brokers, if there is property for sale with the business

• Targeting a business and inquiring about its availability

Evaluating the Business

As a buyer, first evaluate a business by reviewing its history and the way it operates. Develop an understanding of the business method of acquiring and serving its customers, determine how it generates its sales, learn its marketing strategy, and develop an understanding of its finance and operations functions.

Checklist of material for the evaluation process*

To evaluate the business and make a reasoned buying decision, the following information (if applicable) will be needed from the existing business:   

• 3-5 years financial statements

• 3-5 years tax returns

• Interim financial statements

• Projections

• Debt schedule

• Accounts receivable and aging schedule

• Accounts payable and aging schedule

• Details of equipment leases and other contingent financial commitments

• Inventory list

• Supplier list (including contracts)

• Customer list (including contracts)

• Organizational charts and employee contracts

• Copies of all real estate, leases, or deeds

• Industry information to which the owners may have access

*Checklist provided by the SABRE Group (Confidential Business Sales and Valuations of Greensboro / Raleigh / Durham / Greenville)

  Important Questions/Issues to Address

Evaluate the business’ potential according to your goals, employer responsibilities, product or service demand, market, and financial considerations. Ask and get answers to questions regarding all aspects of an existing business before entering any purchase agreements. The services of an accountant, attorney, banker and your local Small Business and Technology Development Center counselor are recommended when buying an existing business. Investigation and research will be crucial to uncovering as much information as possible about the business for sale. Start with basic questions, like those listed below. Others may be required depending on the specific business:

• Why is the business for sale? (Attempt to delve below the initial answer the owner may give.) Will the owner finance a portion of the purchase price?

• Has it been making a profit? If not, do you have a plan to make the business profitable? Will the business be able to pay you a reasonable salary, make the loan payments if you are getting a loan to purchase the business, and still make a profit?

• Is the business worth the asking price? (Get the help of a Small Business and Technology Development Counselor www.sbtdc.org or accountant help you evaluate the value of the business.) 

• Are all of the books in order and well maintained? Have you reviewed the past and current financial statements with the counsel of an accountant? Are there any liens against the property for sale? Are there any claims on inventory or equipment? Have the taxes been paid to date?

• What kind of reputation does the establishment have currently? How would you change that reputation, if needed?

• What type of customers make up the client base - a few large clients or many smaller customers? Are they loyal because of a personal relationship with the owner or because of the level of quality service?

• Will the sale include equipment, property, inventory, debts, employee contracts, name, logo, slogans, signage, customer files, etc.?

• Have you reviewed existing business contracts and the effect of the transaction on those contracts?

• Will the lease be transferred into your name or will the owner require a new lease? How much time remains on the lease? (The bank may require a lease for the length of your loan.) Is the location suitable for your plans? Are there any environmental concerns with the location? Are there licensing concerns?

• What contingent liabilities exist?

• What policies have been established with the employees regarding work environment, salary / commissions, benefits, vacation pay, and fringe benefits?

• Will the owner be cooperative with the transition of ownership with regard to tax issues, utility transfers, government requirements, employees, and other procedures?

• Are there any environmental issues with respect to your chosen business?

• If you are using a business broker, remember that s/he is representing the interest of the seller.

• Consider a non-compete agreement with existing owner(s).

• Consider a contractual arrangement with present owners for a period of consultation.

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