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When you first began to think of opening a business a part of the process is typically looking at other similar type business to determine need and approach. It is also done often when considering expanding a business to determine areas to look into developing. Sometimes in the process you are presented with the option of purchasing an already established business as your start up or as a way to grow. On occasion somebody makes an offer to purchase the business you started. This will give you things to consider in these instances.
Know What You Are Buying
It seems very obvious but it is the most significant factor when buying (or selling) a business. What is included? Are you simply buying a business name? It is not common in the brick and mortar world but does happen on occasion where a business name is so well established that it has value on its own. In the internet world buying just a domain name is very common.
If more than a name is included it is important to understand all of the inclusions. Office supplies and furniture, computers, even real estate may or may not be included. These hard asset items are relatively easy to assign a value. The more difficult and far more important are the somewhat intangible things like customer databases, lists, vendors and sources as examples.
The most important consideration is obligations and receivables. Often, when you buy a business you are assuming liability for all of its outstanding debts. Since very often a business being offered for sale is not performing well these debts can be substantial and they become yours when you purchase the business.
Equally, if there are outstanding billable accounts it must be clear who is to receive that income as it is collected. The rule of thumb is you assume the debt you also will get the receivables. Remember all debt will need to be paid but it is unlikely you will collect on 100% of receivables. Careful accounting history must be examined to determine the percentage that is actually collectable and consideration that past due clients are even less likely to pay a new owner.
Terms of Sale
In addition to the specifics of what is being purchased clear terms must be determined. A customer list may have a lot of value if it is just yours but if they sold that list or database to 5 other competing businesses as well then it has far less value. This is an area that is sometimes difficult to verify in small businesses but needs to be looked at.
If you are only purchasing the business and not exclusive rights to the business name as well (common in a family owned/named business) then it should be documented how long before they may open a new business or competing business with that name. It is not uncommon to “sell” a business to shed debt and obligations only to have the selling party reopen 3 months later with the same established but no debt. That greatly devalues the purchase must be discussed and part of a purchase contract.
Professional Help
The use of accountants is a must when deciding whether to purchase a business. Always hire your own accountant to look over the books and tax records. It is far preferable to use your own or an independent accountant than simply accept copies from their accountant at face value.
An attorney should review everything thoroughly. Things such as use of name and financial obligations should be completely detailed and listed in the contract. A search of public records for pending litigation needs to be completed so you do not assume liability for an ongoing lawsuit that may not appear in accounting records.
In many instances a specialist in buying and selling business is a wise decision. They have experience in reviewing terms and placing values on soft assets like customer databases and business names. A group that specializes in these transactions such as Axis Partnership – Sell My Business can assist you in either the purchase or sale of a business.
