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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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