Buying a Small Business
Section 6. - Buying a Business
Buying a small business can be a viable alternative to starting up a new business from scratch, even though there are many similarities. For instance, you still should determine if you are cut out to be an entrepreneur; you still need to do your detailed planning (and write a business plan if you are seeking outside capital); you still need to fund your business; and you still need to operate it successfully on a daily basis.
Buying a small business is also much different than buying a large corporation. If you are ever curious about how big corporations change hands, read Barbarians at the Gate, by Bryan Burrough and John Helyer. This book was written several years ago and describes the largest business transaction in Wall Street history. It is fascinating.But, in this report we are talking about buying a small business, where we have a willing seller and a willing buyer. This is a simple straightforward method of changing business ownership…or is it? Advantages of Buying over Building
Speed is the single biggest advantage of buying a business. From the first day of negotiation, to owning your new business, can take just a few weeks—sometimes quicker if much of your planning was done ahead of time. Almost all of the start up headaches are non-existent; you have a trained staff ready to follow your lead; you have a customer base operating on a daily basis; your vendors are all set up and providing goods and services to the business; and all equipment and operations are in full swing the day you take over. Of course that does not mean there will be nothing for you to do—you will still need to put your own stamp on the new business and modify certain things to meet your requirements, but at least you have a going concern to work with. Disadvantages of Buying a Small Business
There are also a few disadvantages to buying vs. starting from scratch. First of all you will be buying the results of the work done by the seller in building the business, and they will certainly expect to be paid for their efforts. This is something a startup does not need to consider. Secondly, even though it is sometimes easier to finance a "purchase", there is always the requirement for a substantial amount of money for the down payment, and this can be a problem. If your new primary lender requires you to put 20% or more into the purchase price, plus have adequate operating capital, they do not want to see you borrow that money from anywhere else—they want you to have your own "skin in the game." There is no simple answer when comparing the advantages and disadvantages of buying a small business vs. starting a new business from scratch. However, the following reports can help you with your thinking process, as they present the things you will need to take into consideration when considering buying a small business:
List of Reports For This Section
BEFORE YOU BUY A BUSINESS
For a new buyer of a small business, the information discussed in this report is usually the biggest "bug-bite," because it deals with the emotional side of buying a business. This report can help you separate emotion from your analysis so you can make a calculated and well thought out decision. HOW TO BUY A BUSINESS
This report gives a general overview of the process plus some tips on what to watch out for when you set out to buy a business. BUSINESS VALUATION METHODS
There are no MSRP tags on businesses for sale. The seller places a sales price on their business that they would like to receive, and the buyer makes an offer on the basis of what their analysis thinks the business is worth. How these numbers are arrived at are discussed in this report. SMALL BUSINESS INVENTORY MANAGEMENT
If the business you are thinking about buying has an inventory, whether it was produced, distributed, or purchased—you will have a very important requirement to thoroughly examine and evaluate that inventory. This report will give you some guidelines on this process. EMPLOYEE RETENTION
This can sometimes be an issue if the employees are made aware that the business is up for sale long before the buyer comes on the scene. How to handle this potential problem is discussed in this report. BUYING A MANUFACTURING BUSINESS
There are two major issues to consider when buying a manufacturing business; (1) equipment, (2) inventory. This report helps you deal with these two considerations. LOANS TO BUY A BUSINESS
This is an interesting topic because there is often more opportunity to borrow money for buying a small business than there is for starting a business. This report discusses some of these differences and requirements. DUE DILIGENCE
The most important part of buying a small business, since this activity can usually make or break the deal, or could even be the missed opportunity to start your new business out on the right foot. BUYING A FRANCHISE BUSINESS
This is a special situation that transpires somewhat differently than just buying an independently owned small business. The considerations for buying a franchise business are discussed in this report. TIPS ON BUYING A BUSINESS
We all know the devil is in the details, and this report presents a few tips on those details and how they can be turned to your advantage.
There is much to consider when you think you want to buy a business. It may, or may not, be easier and more profitable than starting one from scratch. This module tries to delve into the detail issues of buying a small business and guide you through the thought process. To start this process, I suggest you read the next report in this series, Before You Buy a Business.
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2/10/12
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