If you’re looking to get into the business world by purchasing an existing company, you aren’t alone. Despite current economic conditions, businesses are selling more frequently and for higher prices than ever before. Here is a comprehensive checklist to help you buy a new business. There are numerous reasons to buy an established company instead of starting from scratch, including:
- Cash flow
- Established market segment and customer base
- A working business model
- Brand reputation
- Existing infrastructure
- Relationships with vendors and clients
We all know that startup ownership comes with its share of risks—as well as a high failure rate. When the odds are stacked against you, buying an established company gives you a better chance of success. Here, we’ll go over some things prospective owners should consider when buying a business.
Why Checklists Are Important for Business Buyers
When working with business brokers in Austin, buyers must consider multiple factors. Even if you know what you’re looking for, it’s a good idea to make a list of must-haves. The checklist below will help you avoid pitfalls and get the information needed for informed decision-making.
Deciding Where to Invest
As you’re considering the purchase of an existing business, the first step is to decide where to invest your money, time, and effort. There are thousands of choices out there and knowing what to look for will help you choose the right company.
Multiple business structures, including LLCs, corporations, and sole proprietorships, are available. However, since most deals are asset deals, your corporate structure, as the buying entity, should be discussed with an M&A attorney and CPA, as you start the process. Those buying businesses in Austin should look for profitability, consistent cash flow, and a good reputation within the community. These factors, among others, will ensure that a business is a good short- and long-term investment.
Next, you’ll need to learn about options within each business industry. When purchasing an existing company, it’s best to narrow the search to those within your desired category. Get a head start by searching local and online business listings or asking for recommendations.
As you’re narrowing the field, ensure that you’re focusing on solid investments by reading up on the companies in which you’re interested. Find out about each company’s reputation and financial performance and read online reviews. Finally, in-person visits will give potential buyers an idea of how a business is operated and managed.
Before buying a business, you’ll need to get your affairs in order. Start by putting together a personal financial statement and a buyer profile, which should outline your work experience and how it relates to companies you may want to purchase.
The gathering of these documents may seem tedious and time-consuming, but they demonstrate that you’re serious about buying a business. Because this information is so sensitive, it’s best to keep it under wraps until you’ve found a business broker or a company to buy.
Another great strategy is to get prequalified for a loan through the Small Business Administration, or to get financing through a non-SBA commercial loan or a withdrawal from a retirement account. When buyers take this step, they’ll know just what they can afford—and they’ll have an edge over those who look for businesses first and find financing later. The SBA has a personal financial statement and buyer profile documentation that you will fill out for your bank of choice.
Learning the History of the Business
Every potential business buyer should find out why the current owner has decided to sell. The answers they offer will give clues as to the company’s quality and viability. Is the owner ready for retirement or an occupational change? Great! Are they getting out of the field because of market fluctuations and changing regulations? Those changes may not be very beneficial.
If the owner provides vague answers—or worse yet, none—keep digging into competitor, market, and industry data until you’re satisfied. Many business buyers learn about industry outlooks by working with trade associations and analyzing census and economic data. As you’re talking to the current owner, find out about their background and that of their management team. Are their skills mission-critical, or can the company survive without them?
Assessing the Company’s Finances
Now, you’ll need to decide whether the business’ earnings will sustain your lifestyle and look for ways to increase them. Ask an accountant to look over the company’s last three years of financial statements to see if its revenues are rising or falling. It’s also a good idea to ask for the past three years’ tax returns and financial ratios, including gross profit/net sales, net income/total assets, and net income/net worth.
Buying an existing business means asking a lot of questions. Is the company in debt, and if so, what’s the nature of that debt? Are any bills or invoices past due? How well does the business manage its finances? You’ll need to figure out how receivables are handled. Do customers pay on delivery or use the net 90 system? While it is possible to change invoice terms once you’ve taken over, loyal customers may be resistant to those changes.
Working Through Legal Matters
Buying a business is difficult without determining the legal structure under which it was formed. If it’s a stock sale, it’s an as-is purchase, whether it’s an LLC or a S Corp—and you’re also getting everything that comes with it, including assets and contracts, though this usually without any debts.
If you’re planning to change the company’s legal structure, you’ll have to file the conversion with the state. It’s not allowed in every area, and in places where conversions aren’t recognized, buyers must dissolve the existing entity and start over.
Ask an attorney to review the company’s contracts for hidden limitations and exclusions, including leases for property, vehicles, and equipment. Will all these contracts transfer to you as the new owner? The current owner should have contact information for government agencies that handle zoning and other regulations, so you’ll always be aware.
Learn about the company’s proprietary processes and patents, and if there are any, ensure that they’re under the organization’s name. What happens to those all-important rights after the sale has been finalized, and will you still be able to access the technology?
Finally, new business owners must take steps to protect themselves from legal repercussions. When buying an operational business, find out if there are any ongoing or pending lawsuits—or if litigation has been filed in the past. While this is why most deals are asset sales, ongoing litigation could negatively impact a company’s reputation. However, many companies get sued for frivolous reasons, so the presence of litigation shouldn’t be an automatic deal-killer.
Forming Sales and Marketing Strategies
New owners should familiarize themselves with the company’s market segment and learn whether it’s shrinking or growing. With some research, you’ll see what kind of reputation the business has and gauge the level of brand awareness in the target market. Strong brands are some of the most valuable assets businesses can have.
Read the company’s social media pages and online reviews to see what past and current customers are saying about the business, its workers, its products, and its services. Everyone is online these days, which means that you can learn a great deal about a company and its customer relationships on sites like Instagram, Twitter, and Facebook.
Next, it’s time to learn about the competition. What are people saying about other companies in the same space? Are their products and services comparable, or are they offering something that can’t be found anywhere else? How strong are their brands and social media presences? The answers to these questions will give you an idea of what you’ll be up against as a new business owner.
Learning About the Workforce
If the company you’re considering buying has employees, it pays to research them as well as their benefits and compensation. By doing this, you’ll find out whether they’re satisfied with the current arrangement or if you’ll need to sweeten the deal to get them to stick around. Ask your lawyer to review all worker contracts to ensure that the company is following state and federal employment laws.
Getting State Licenses and Permits
As a purchaser, you’ll need to pay attention to the requirements set forth by the Texas Department of Licensing and Regulation. These licenses have certain requirements that must be fulfilled when businesses change ownership. If a business is found to be operating without the right licenses, the owner may receive a cease-and-desist order, be fined, or lose their right to do business in the state. Any decent comprehensive checklist to help you buy a new business should include this research.
Asking About Business Insurance
All businesses need insurance, and the company you’re buying is no exception. The carrier the current owner is using is a great place to start the search for coverage, but it doesn’t have to end there. Insurance policies aren’t transferable in asset sales, and business buyers should have binders in place when closing deals. In areas prone to natural disasters, it may be hard to find the right coverage—so be sure to start looking for business insurance as soon as possible.
Buying a Business: It’s All About What You Know
While this comprehensive checklist to help you buy a new business is enough to get most business buyers started, you may have other questions—which will largely depend on your needs, industry knowledge, and plans for the company. Ask your CPA, attorney, and business broker for advice, and use their answers to make informed decisions. The team at CGK Business Sales is here to make your transaction a complete success; call or click here to contact us.