Melvin Feller MA Illustrates How You Can Buy Any Business During Both Good and Bad Economic Times.
According to Melvin Feller Business Group, if you’re thinking about running your own business, especially in buying a company that’s already established may be a lot less work than starting from scratch. However, you will need to put time and effort into finding the business that’s right for you. This article was written by Melvin Feller in order to take you through the steps of buying an existing business, including how to assess and value a business, your obligations to any existing staff and where you can get professional help.
Actually, there are advantages and disadvantages of buying an existing business and If you get it right, there can be many good reasons why buying an existing business could be the right move for you. Remember though, that you will be taking on the legacy of the business’ previous owner, and need to be aware of every aspect of the business you’re about to buy.
Advantages:
According to Melvin Feller, it may be easier for you to get finance as the business will have a proven track record. A market for the product or service will have already been demonstrated.
There may be established customers, a reliable income, a reputation to capitalize and build on, and a useful network of contacts.
A business plan and marketing method should already be in place.
Existing employees should have experience you can draw on.
Many of the problems will have been discovered and solved already.
You can always re-sell the business.
Disadvantages:
You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants, etc.
If the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
You will need to honor or renegotiate any outstanding contracts the previous owner has in place.
Deciding on the right type of business to buy:
Ideally your business needs to fit your own skills, lifestyle and aspirations. Before you start looking, think about what you can bring to a business and what you’d like to get back. List what is important to you. It is useful to consider:
Your expectations in terms of earning — what level of profit do you need to be looking for to accommodate your needs?
Your commitment — are you prepared for all the hard work and money that you will need to put into the business to get it to succeed?
Your strengths — what kind of business opportunity will give you the chance to put your skills and experience to good use?
The type of business — limited company, partnership etc. — that you’re interested in buying.
The business sector you’re interested in — learn as much as you can about your chosen industry so you can compare different businesses. It’s important to take the time to talk to people already in similar businesses.
Location — but don’t restrict your search to your local area. Some businesses can be easily relocated.
Where to look for a business to buy:
Many national and local newspapers carry advertisements for businesses and business locations or lots.
Depending on what sector you’re interested in, you could look in trade journals. Or put in your own advertisement, saying what you are looking for. You can get contact details for most newspapers, magazines and trade journals from press directories available on the internet.
Some magazines, many of them with their own websites, specialize in buying and selling property and businesses. Of course, do not forget Realtors who use their publications and websites like loopnet.com, Crexi.com, Showcase.com, as well as Marcusmillichap.com and get familiar with their websites, including Craigslist and eBay.
How to value a business:
Understandably, how to value a business is often the most worrying part of buying a new business. Remember, though, that what a business is worth to you will not be the same as it is to someone else with a different set of priorities and objectives.
To get a general idea of how healthy the business is, look at:
the history of the business
its current performance (sales, turnover, profit)
its financial situation (cash flow, debts, expenses, assets)
and why the business is being sold
The following list of questions will help you discover possible areas where you could financially get hurt.
How healthy is the business?
Stock:
How much is there?
What condition is it in?
Assets:
Does the asking price take into account depreciation?
Is anything leased or currently being purchased?
Intangible assets:
How much goodwill comes with the business?
Are any trademarks registered?
Products:
What are the profit margins on each product or service?
Which products or services account for the majority of sales?
Licenses:
Which ones are required to conduct business?
Are there any outstanding issues with the licenses?
Debts:
How old are the debts?
Which debtors owe the most?
Creditors:
What does the business owe?
What is the credit history like?
Suppliers:
What are their prices?
What’s their credit policy?
Employees:
Is the business adequately staffed?
Is it over-staffed?
Do all employees have the necessary skills?
Do all of the employees have the necessary equipment to do their job safely?
Premises:
Do they need refurbishing?
Are they leased or company owned?
Competition
What percentage of the market do the competitors have?
Valuation methods:
Your accountant can advise on how to put a specific value on the business and do the actual calculations. You can then decide how much you want to offer, or if you want to buy it at all. If you do decide to make an offer, the research you do now will be completely verifiable once you’ve agreed a purchase price and terms with the seller.
Make sure the business is worth buying by doing your due diligence:
Having done your research, it is important to verify the information you now have. A period of time is allowed for you to access the business’ books and records in order to verify that all of the information that you have discovered up to now is accurate, and this is known as due diligence period. It should give you a realistic picture of how the business is performing now and how it is likely to perform in the future.
When to begin due diligence.
Don’t start due diligence until you’ve agreed to a price and terms with the seller. For a down payment they may agree to take the business off the market during your investigation.
The investigation period is negotiable — but most small businesses need at least three to six weeks.
Where to get help
You should get accountants and attorneys to help you identify various risk areas but you can also get information about companies directly from the internet. Remember, due diligence is much more than the finances of a business. You need to come out of this period knowing exactly what you are getting yourself into, what needs to be fixed, what the costs are to fix them and if you are the right person to take over this business.
Key areas to cover are:
employment terms and conditions
outstanding litigation
major contracts and orders
IT systems and other technology
environmental issues
commercial management including customer service, research and development, and marketing
Information sources
Dig as deeply as you can and use whatever documents are available. For instance, if you’re looking at employee records, you could check out:
payroll records
staff files
copy of retirement and profit-sharing plans plus financial statements, if relevant
employment contracts
the staff manual
union contracts, if relevant
you may also need information from external sources such as the landlord, tax office or bank.
A step-by-step process on how to buy a business
Get professional advice
Professional help is invaluable as you go through the negotiation, valuation and purchase process. You may find it useful to contact the professional organizations to get advice and help on finding a lawyer or an accountant.
Research
Research the business sector you’re interested in, including the best time to buy. Shortlist two or three businesses.
Make sure a business is worth buying: conduct due diligence and verify any information you have been given. As well as checks on the business, your attorney will conduct searches in order to verify relevant licenses etc.
If you’re planning to arrange a loan, the lender will insist on carrying out their own survey and valuation at your expense, but you may want to pay for an additional independent survey and valuation.
Initial viewing and valuation
Be discreet — the owner may not want staff to know they are selling, but be thorough and record key findings.
Arrange finance
Lenders generally require:
details of the business/sales particulars
accounts for the last three years
financial projections even if no accounts are available
details of your personal assets and liabilities
Make a formal offer
If you make your initial offer by phone, follow this up in writing. Head your letter subject to contract and include this phrase in all written communication.
Negotiation
Before completing the sale, try to negotiate an overlap period so you have time to become familiar with the business before taking over. Record all the main point agreed.
Completion
Even after you reach an agreement on the price and terms of sale, the deal could still fall through. You have to meet certain conditions of sale to complete, including:
verification of financial statements
transfer of leases
transfer of contracts/licenses
transfer of finance
Looking after existing employees:
There are regulations that govern what happens to employees when someone new takes over a business. These apply to all employees when a business is transferred as a going concern, meaning employees automatically start working for the new owner under the same terms and conditions. For more information, check on your responsibilities to employees if you buy or sell a business.
Inform and consult employees
If you do want to discuss reducing numbers of employees or reorganizing the staff it’s a good idea to do this once you’ve completed the due diligence period, but before you take over the business. As the new employer you should inform and consult all employees — including employee representatives — who may be affected.
Employee Retirement Plans
As their new employer, you do not have to take over rights and obligations relating to employees’ retirement plans put in place by the previous employer. However, if you don’t provide comparable retirement plan arrangements, you could theoretically face a claim for unfair dismissal.
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