The last couple of days, we discussed starting a new business and some factors for consideration in purchasing an existing business. Now that you selected the business and negotiated a price the seller accepts, you get your financing in place. Preliminary plans for financing hopefully took place prior to negotiation for purchase. Having some financing committed makes purchase negotiations easier. See our previous articles about financing.

So now let’s finalize the sale!

The business property should be appraised by a commercial appraiser and of course the purchase price should not exceed the appraised price. At the end of negotiations the seller customarily receives a signed Earnest Money Agreement from the buyer. Both the buyer and seller sign a purchase contract and agree to a closing date when title of the business passes from seller to buyer.

The actual closing passes title and exchanges either money and/or a promissory note unless the sales contract specifies a contract for deed sale. Your attorney should review all documents prior to closing. The buyer’s attorney takes care of financing paperwork, leases, licenses and permits for the new owner and will advise you of necessary documentation for government authorities.

You may also need to sign for a lease of the premise if the premise is not part of the sale. Make note and begin the application process for any licenses or permits needed when you take over the business. Apply for the appropriate documentation such as an Employer ID number and bulk sales. Fix a day for a final inventory, final accounts payable and accounts receivable and inspection of the business. If the purchase takes place with a business broker, the business broker assists you in making sure all paperwork is on track and in hand at the closing.

The seller’s attorney draws up any necessary leases between seller and buyer, any promissory notes between seller and buyer, disclosing all liabilities and liens, documentation of accounts payable and receivables and provides the inventory.

Once you take over the business, remember to change all the locks so any outstanding keys don’t become a concern. Notify all employees and suppliers of the change in ownership and make sure your licenses and permits are all in order prior to commencing business.

As a business owner, welcome to a whole new world of challenges and rewards!

Once you identify what types of work you like and where your expertise lies, decide where you are willing to live. The best business purchase for you may be in a different location; are you willing to move? Select locations conducive to the type of climate you like, the size of city or town you prefer and where there are activities you enjoy.

Now it’s time to start the search. Newspapers from the locales you choose provide information not only about businesses for sale, but the lifestyle available in the locale. Search the Internet for general information, ideas of types of businesses for sale, and about locations you think may suit you.  When searching, use terms such as “businesses for sale”, avoiding “business opportunities”. The later type search often leads to those seeking investors or “get rich” schemes. Business brokers offer a wealth of knowledge and may lighten the load of research about specific businesses in which you have an interest. Those new at searching for businesses benefit greatly from an experienced business broker.

Choosing a well run business with potential offers a significant challenge. After you locate interesting businesses, you still must valuate each business, negotiate a fair price, and secure financing.

The valuation of a business often differs depending on whether you look through the eyes of the buyer or seller. A very basic approach is to look at the profits generated by the business in the previous 5 to 10 years, analyze the profit potential for the next 5 to 10 years, subtract the amount of fair wages needed to generate that profit, subtract tax liability based on the business’ profit and then evaluate if the asking price can be paid from balance of profit within a 5 to 10 year period.

The amount of inventory on hand, collectible accounts receivables, outstanding accounts payable, the goodwill of the business, value of the business’ real estate and other property being sold with the business all factor into the actual value of the business. No exact formula exists; the evaluation process is usually rather complicated. Negotiation power comes from knowing as much as possible about the seller, the business, the number of other businesses available for purchase in the general area and the economy, particularly in the locale of the business.

You’ve decided to purchase a business! Yesterday we listed some of the beneficial factors that come from purchasing an existing business. Whether you purchase an existing business or start a brand new business, some important decisions lay ahead.

Is the business you selected suited to your personality?

The business you choose should be one that fits your way of life. If you hate getting up before the sun, a coffee franchise is a poor choice of business for you. Evaluate how the proposed business affects your desired lifestyle.

Do you have the technical expertise required?

If you know little or nothing about computers, stay away from a computer repair business! Choose a business that matches your expertise and your interests. Expertise is very important, but interest is probably just as important. Liken purchasing a business to a marriage - you need a long term commitment.

Are you a self-starter?

Owning a business requires the proprietor’s dedication and commitment. No one hounds you, reminds you or bosses you around; but you must possess the ability to know what needs doing and get it done. Sick days, vacation and days off here and there “just because” usually become luxuries a small business proprietor can’t afford.

Are you a “People” Person?

Many small businesses depend on daily interaction with customers. Customers and employees come in all sizes, shapes and temperaments especially on days they feel rushed, out of sorts or angry. Business proprietors may at times fit the customers’ and employees’ need of a dog to kick. While employees may fear discipline; customers won’t. If you prefer working in silence, without constant interruption and cranky customers and employees, choose your business wisely.

How is your Financial Prowess?

Small businesses often fail due to financial problems. Even if you hire a bookkeeper, you better understand financial matters. Business owners without financial checks and balances find often employees steal from the business. If you don’t understand your own financial affairs the possibility of one or more employees stealing greatly increases.

In future posts, we’ll continue discussing important considerations in purchasing a business. Be sure to ask questions in the comment section that you want to see addressed

Entrepreneurs make the giant step of starting a business for a myriad of reasons. Being your own boss usually is the most compelling. Americans grow up in a country that encourages and rewards initiative and drive. The wish for autonomy and a need of self expression often speaks loudly within entrepreneurs.

While self-actualization drives you toward business ownership, a successful business takes much more than an inner drive of self-expression. If anything, owning your own business teaches that rules, policies, procedures, hard work and commitment along with following excellent business principles determine success or failure. The hard facts indicate that 50% of all new small businesses fail within 3 years and within 5 years, 70% fail.

Want to beat those odds? Consider using your entrepreneurial drive by purchasing an existing profitable business. But prepare beforehand by understanding that jumping into an existing business and changing everything spells disaster. So the downside of purchasing an existing business means letting go of that “self-actualization” dream and dictating every aspect of the business. But the upside means a business with a better chance of success, an existing customer market, established cash flow and proof of a business concept that works.

An existing business certainly provides room for tweaks, better or streamlined business methods, additional product lines and growth. Once you run the business day to day and become knowledgeable about what works and what needs improvement, you find the areas needing your personal entrepreneurial flair. Over time and experience the existing business slowing gets worked into your business with your personal stamp; but tread slowly so that you retain customers loyal to the business.

In future posts we discuss more about purchasing existing businesses.