Advantages --
- may have good location
- established employees and suppliers
- equipment is installed with established capacity
- pre-existing inventory
- established trade credit
- ready to operate
- build off the expertise of previous owner
- may be discounted
disadvantages
- may be for sale due to deterioration
- previous owner may have created ill will
- employees inherited may not be suitable
- location may not be suitable
- equipment and facilities may be obsolete
- change and innovation are hard to implement
- inventory may be outdated
- accounts receivable may be worth less than face value
- the business may be overpriced
the right way to buy a business
Buying a business can be a treacherous experience was the buyer is well-prepared. The right way to buy a business is by analyzing your skills, abilities, and interest to determine the ideal business for you; preparing a list of potential candidates, including those who might be in the hidden market; investigating and evaluating candidate businesses and evaluating the best one; exploring financing options before you actually need the money; and, finally, ensuring a smooth transition.
Rushing into a deal can be the biggest mistake a business buyer can make. Before closing a deal, every business buyer should investigate five critical areas:
- why does the owner wished to sell? Look for the real reason.
- Determine the physical condition of the business. Consider both the building and its location.
- Conduct a thorough analysis of the market for your products or services. Who are the president and potential customers? Conduct an equally thorough analysis of competitors, both direct and indirect. How do they operate and why do customers prefer them?
- consider all of the legal aspects that might constrain the expansion and growth of the business. Did you comply with the provisions of a bulk transfer? Negotiate a restrictive covenant? Consider ongoing legal liabilities?
- analyze the financial condition of the business, looking at financial statements, income tax returns, and especially cash flow.
Placing a value on a business is partly an art and partly a science. There is no single best method for determining the bayou of the business. The following techniques are useful:
- the balance sheet technique/adjusted balance sheet technique
- the earnings approach/excess earnings method
- capitalized earnings approach
- discounted future earnings approach
- market approach
Negotiating the deal
selling a business takes time, patience, and preparation to locate a suitable buyer, struck a deal, and make the transition. Sellers must always structure a deal with tax consequences in mind. Comment exit strategies include a straight business sale, forming a family limited partnership, selling a controlling interest in the business, restructuring the company, selling to an international buyer, using a two-step sale, and establishing an employee Stock ownership plan (ESOP).
The first roll of negotiating is never confuse price with value. In a business sale, the party who is the better negotiator usually comes out on top. Before beginning negotiations, a buyer should identify the factors that are affecting the negotiations and then develop a negotiating strategy. The best deals are the result of a cooperative relationship based on trust.
