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Buying Your Freedom
If you're reading this article, it's probably because you're one
of millions of people who dream of breaking free of indentured
servitude to make it on your own in a business of your own.
When it comes to making the break from the paid workforce to
business ownership, you basically have two choices: to start a
new business from scratch (often in your basement during the wee
hours since you have to continue to work full-time in your Just
Over Broke J.O.B. to pay the bills until your business gets off
the ground) or to acquire an existing business.
In this article, we look at the advantages, disadvantages, traps
(and how to avoid them) and issues to be borne in mind when
buying an existing business.
ADVANTAGES
There are many advantages of acquiring an existing business
rather than creating one from the ground up, including:
=> Less Risky
If the business has been around for a reasonable length of time,
it's survived the dreaded first cut - that alarmingly high
proportion of new business ventures that fail within their first
couple of years.
=> Proven Concept
One of the most nail-biting parts of starting a new business is
the worry that, while you THINK your idea will fly, you're
really not sure until it's time to leave the nest. Acquiring an
existing business should give you comfort that the idea behind
the business works.
=> Existing Customer Base
Without a doubt one of the most difficult, expensive and time-
consuming duties of a new business owner is cultivating a
customer base. When you acquire an existing business your
customer-base is ready-made and you can hit the ground running.
=> Predicting Future Growth
An existing business has a track record. You can review profit
and loss reports, prior year tax returns and other financial
information to see how the business has developed over time.
This gives you an informed basis from which to predict the
future growth of the business.
=> Reduced Need for Working Capital
With an established business you have immediate cash flow from
the business's existing revenues. This means you only need
enough working capital to meet day to day requirements, not a
great wad of cash to see you through the first slow, painful
months until you start generating cash which is invariably the
case with a startup.
=> Existing Suppliers
Just as an existing business comes with a ready-made customer
base, so too it comes with a ready-made supplier base and
history of dealings. These suppliers will be keen to retain your
business and so you will probably save a lot of time and expense
that you would otherwise have had to expend to sort through
competing supply terms. Existing suppliers are more likely to
give you a good deal off the bat.
=> Capital Raising
Obtaining finance will also be less difficult (note I didn't say
easier!) since you will be able to point to a track record.
DISADVANTAGES
The main disadvantage of an established business compared to a
start up is cost. At first blush, acquiring an existing business
is more costly than a startup. Over time, of course, it may turn
out that a startup is a much more costly venture, especially if
that startup venture fails.
ISSUES
Assuming that you decide an existing business may be for you,
what do you need to think about?
=> Deciding on the Type of Business That's Right for You
This is a very personal decision and will depend on your answers
to the following questions, among others:
* Why do you want a business as opposed to a job? * What special
skills and background do you bring to the table? * What is the
nature of your work and/or business experience? * What are your
hobbies and special interests? * How much can you afford to
invest as a downpayment? * How much money do you need to
generate to meet your living expenses?
=> Finding the Business That's Right for You
Once you've decided on the type of business that you want to
acquire, it's time to start the hunt. The most efficient way is
to engage a business broker. Most vendors of businesses list
their businesses with brokers rather than attempting to find
buyers themselves. For this reason, you'll most likely find that
the business that's right for you is listed with a broker.
You could, of course, also directly approach the owner of a
business you're interested in buying to see whether there is any
interest in selling. Depending on whether you're in a buyer's or
a seller's market, you may put yourself at a negotiating
disadvantage by doing this. Only make such an approach in a
buyer's market.
=> Financing Your Business Acquisition
Probably the biggest hurdle you will face is getting finance for
your small business acquisition.
Here are your basic options:
* Vendor Terms
Sometimes a vendor will be willing to sell you the business on
terms. For example, a 10% downpayment followed by future
payments from the cashflow of the business. The vendor will
usually retain a lien over the assets of the business until the
purchase price is paid in full.
* Loans
There are various sources of loans. For small businesses, your
best bet is probably not the major financial institutions. Try
instead loans guaranteed by the U.S. Small Business
Administration (or the equivalent in your country if outside the
U.S.) and community banks.
* Third Party Loan Guarantees
If you're short on security, consider the possibility of a
creditworthy friend or relative acting as surety.
* Credit cards
Credit card financing should generally be treated as a last
resort but utilized judiciously, credit cards can be useful for
cash flow purposes so long as the outstanding balance is paid
off each month. Don't use them for asset purchases though.
* Family and Friends
Not a good idea for everyone, but consider asking family and
friends to invest in your business.
* Asset Sale/Leaseback
Another good way to raise cash is to sell an asset you have
acquired as part of the business to a friend or relative and
have them lease it back to you. You free up your capital and
your friend or family member has an asset-backed security.
* Redeemable Preferred Stock
A good option if your business is held by a corporation and you
are prepared to give up ownership equity in exchange for
capital. There are securities issues to be aware of here so be
sure to consult your lawyer.
=> Cashflow Considerations
Be sure the business generates enough cashflow to cover:
* operating expenses; * your salary; * financing costs; and * a
reasonable return on investment.
TRAPS FOR YOUNG PLAYERS
If your acquisition takes the form of acquiring the shares in a
corporation rather that a simple asset purchase, beware. In
these circumstances, the legal entity doesn't change, only the
shareholders do. This means that if the corporation has any
undisclosed debts, pending lawsuits and the like, these can
still be sheeted home to the corporation despite the change in
shareholding.
In addition to these traps for the unwary, beware also of
overstated earnings, poor employee relations, overvalued
inventory and uncollectible receivables.
AVOIDING THE TRAPS
Fortunately there is much you can do to flush out these hidden
traps before you commit yourself.
=> Get Professional Advice and Assistance
First and foremost, do NOT attempt to acquire a business without
the professional assistance of your lawyer and accountant.
=> Contractual Indemnities
Your lawyer will no doubt try to include provisions in the
purchase and sale agreement whereby the vendor indemnifies you
for any liabilities accruing prior to the date of sale. The
effectiveness of the indemnity as a protective mechanism depends
on the solvency of the vendor.
=> Due Diligence
The best way to protect yourself is to educate yourself about
exactly what it is you're getting yourself into. Your lawyer
will guide you through the due diligence process which is
nothing more mysterious than asking the right questions and
making sure you get the right answers.
Here's a checklist of things that your lawyer will help you do
during the due diligence period:
* Find out why the seller wants to get out of the business. *
Review operating information. * Review all contracts to ensure
there are no hidden liabilities. * Get a list of all the assets
being sold including fixtures and equipment, patents,
copyrights, trademarks etc. and make sure they are free of all
encumbrances. * Get a schedule of all the debts of the business
that you will be assuming. * Check the company's articles,
bylaws and corporate minutes to ensure the company is what the
vendor says it is. * Check to ensure the company is in good
standing. * Get a list of shareholders as well as any special
rights, stock transfer restrictions and pledges that may exist
against the assets of the business or the stock. * Check all
financial documents including bank statements, audited financial
reports, and bank and financing agreements to ensure there are
no undisclosed security interests. * Physical inventory and
inspection of all assets.
Acquiring an existing business is a major undertaking and one
which must be accompanied by competent, professional advice.
Assuming that you complete thorough due diligence so that you
understand EXACTLY what you're acquiring (liabilities as well as
assets), you may well find that despite the funds you invest,
it's the most cost-effective way to go!
About the author:
Elena Fawkner is editor of A Home-Based Business Online ...
practical home business ideas, resources and strategies for the
work-from-home entrepreneur. http://www.ahbbo.com
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