Home Business
(featured column)
Buying Your Freedom
by Elena Fawkner
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 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 down payment?
* 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 cash flow 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 dale 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!
*
* *
Want more
money-saving tips? Get a FREE
subscription to our monthly Ezine!
Copyright
© 2002 by Elena Fawkner
|
Search for your perfect job at CareerBuilder!
|
