Buying a business may provide considerable benefits over starting a new business. Before taking over an existing business or starting a new one, you should understand the downsides related to both options.
An existing business already has an established customer base, an established location, inventory and suppliers, trained employees and a reputation in the market; you only have to improve or keep up on what has already been achieved. When purchasing a business, the financial statement of the business somehow helps to establish a value for the company. The company may show significant receivables on the company’s balance sheet’s. The issue is whether these can actually be collected or will eventually be written off as bad debts.
Starting a business is certainly risky as you have to deal with many uncertainties. These uncertainties are usually about the profitability and customers’ response to the company’s products and/or services. When you start a company, you will be in full control and will be able to develop the business according to your own specifications. You can gather your own management team as you can have the freedom to select the best people you can work well with and as a team.
When you buy a business, you absorb the people already in place and it takes time to get rid of the poor performers. In an existing company, the new owner may struggle to implement changes because the policies and procedures are already in effect.
Addressing the current business owner these significant concerns can help you assess the existing business.
– It is important to ask for all the documentation that can help you confirm the revenue history of the business. This will give you a clear idea of how the business has done over the past years. You may also want to find out how much money has flowed in and out of the business on a daily, weekly, monthly and yearly basis. Proper accounting of the expenses and revenues will give you a good idea of the potential profitability of the business.
– You need to know any impending legal responsibilities associated with the business. Find out whether the existing owner is aware of any past, current or potential legal disputes related to its operations. Find out if the business has any contract disputes, employment disagreements, leasing issues, or government regulation issues.
– The business owner needs to provide a financial record of assets and liabilities of the business. Find out what the business owns, and what the business owes. Do the assets outweigh the liabilities? Is the owner aware of any financial assets or liabilities that do not appear in the company’s records?
– It is necessary for you to obtain from the business owner a copy of any written contracts entered into by the business so you are aware of all contractual obligations.
– You need to ask the business owner to produce evidence that the business is properly registered and legally operating. Ask for copies of all documents related to government taxes which include tax returns, tax ID numbers, and more.
Buying a business involves a huge amount of money, so its legal and financial aspects are extremely important. It is necessary to seek legal assistance. Look for a competent lawyer and accountant to perform due diligence on the business you plan to take over. Due Diligence is a procedure performed to review and verify all the relevant information about the business you are considering. A competent lawyer will be able to:
– verify important details about the target company, such as its registration details, current directors, shareholders, recent financial statements,and any outstanding back taxes
– assists in drafting and preparing the share transfer agreements and a contract detailing any other terms and conditions about the sale of the company
– prepare the legal documents and government forms necessary to register the restructuring of the company
Yes, you can purchase the business, excluding the company running it. This option is beneficial because the new business owner will not absorb the liabilities involving the first company. But this option may need to consider such cases where there are business licenses that are difficult or no longer possible to obtain.