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Buying An Established Business

Some people feel that buying an established business is a reliable short-cut to becoming a successful entrepreneur. The existing business offers many advantages such as an established business method, clientele, profit picture, perhaps premises and inventory and very often a reputable name. However, one very important question must be answered; why is the business for sale? 

As with any short-cut, however, there is a price to pay, and in this case there are really two "prices". One is money, and the other is time and effort. If you buy a prosperous business, the money you give for goodwill (the good reputation of the business) is paying for these advantages. This may be money well spent. On the other hand, it may be money wasted if the business is really failing or has unforeseen problems.

Before purchasing a business, insist on reviewing financial statements for as many previous years as possible (up to five years). Obtain lists of clients or customers and suppliers. All leases and outstanding contracts must be reviewed. The decision to buy should not be made lightly, get professional advice (an accountant to review financial information and a lawyer to review leases, business contracts, etc.,) before purchase agreement.

Each year many small businesses are bought and sold. A lot of key issues must be considered before you complete the final purchase.

Two of the most important issues are the following:

Why is the business for sale?
How much should you pay for the business?

ADVANTAGES

Limited risks.
Success of the business location has been proven.
Cash flow begins immediately with sales to established customers.
Employees may already be trained and knowledgeable.
New owner inherits the goodwill and reputation.
Inventory already exists and suppliers are known.
Relationships with suppliers, bankers, and so on, are established.
Business is equipped and furnished.

DISADVANTAGES
Location, if not satisfactory, is difficult to change.
Potential for decrease in sales because owner's departure could result in loss of loyal customers.
Some employees who stayed with the business may not be assets.
Inventory may be out of date, overpriced, or not to the new owner's liking.
Business may require expensive modernization.
Seller may have hidden reasons for selling business.

RELATED INFO

Market Research
Your Product Or Service
Your Customers
Your Competition
Getting A Financial Picture
Business Guide

RECOMMENDED  LITERATURE

A Basic Guide for Buying and Selling a Company - This outstanding guide contains all the essentials with regard to the interaction of people transacting for small businesses and how to maximize your chances to obtain fair deals. Explains how to effectively use a business broker, methods of payment available to the buyer, deal with an attorney, how the seller prices the company, and much more.

How to Buy and/or Sell a Small Business for Maximum Profit: A Step-by-Step Guide - This book provides a road map of suggestions, insights and techniques for both buyers and sellers. It covers the entire selling process step-by-step—from making the decision of when to sell or buy, through determining how to market the company, to understanding the various legal & financial documents involved in a sale, and on to closing the deal and handling the transition afterwards. This book is geared toward the novice entrepreneur who wants to buy or sell a small business. Topics covered include: finding and evaluating a business to buy and/or sell, how to value a business, raising the necessary capital, evaluating a business financial condition using discounted cash flow, excess earnings, asset value, and income capitalization, brokers, leveraged buyouts, letters of intent, legal and tax concerns and contracts.

 
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