If the business resides in a mall, talk to other business owners in the mall about mall management, lease rates , anchor tenants, etc. A departing anchor tenant can mean a huge drop in business traffic for the mall or management may be in the process of renewing leases at a higher rate. Find out what's actually for sale and what method of business valuation is being used. If you buy a small business, what assets are you actually getting? People selling businesses often have a spec sheet prepared, listing the assets involved and an estimate of their value.
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Ask for details if anything is unclear. Pay special attention to any intangible assets that may be listed, such as goodwill. Sellers tend to inflate the value of this, thinking perhaps of the potential future value of their reputation and established customer base. Remember the old joke about the guy who bought the good looking car only to discover he couldn't drive it away because it had no engine?
It's only funny when it happens to someone else. Make sure you do your due diligence before buying a small business. Study the business's past financial performance. Ask for and examine the last three years' worth of the business's financial statements, and consider enlisting the help of an experienced CPA to help. You will also want to know who prepared and reviewed the financial data.
Was the final version prepared by the internal management and accounting staff of the business, for instance, or by an outside accountant? If the company uses an outside accountant, documents should accompany the financial statements that will explain the depth of the accountant's review. A Notice to Reader signifies that the accountant prepared the financial statements based on information provided by the business without conducting any checks. Don't like what you're seeing or just not seeing enough of it? Ask the seller for permission to see more detailed business records that support the data in the financial statements, and get your own audit done.
Find out what you should actually pay for the business. When you're buying a used car, this is a simple matter of comparison shopping, but business valuation is considerably more complicated.
Streetwise Advice: 6 Tips for Buying a Business
This provides a way to come at the value from different angles and typically results in a range of value, rather than one set figure. This way, they get guaranteed income for the coming months or years, depending on your plan. There are rules around seller financing , particularly if you plan to use another form of debt financing as well. Some sellers might also be willing to trade in some assets, like some furniture they really loved or the company car, for a lower price.
Understandably, not all sellers will be open to this option, since they more likely than not want to wash their hands and walk away from the sale. Instead, the SBA guarantees a big portion of the loans you can take out from a bank or alternative lender. For buying an existing business, the 7 a loan program is the way to go.
It works pretty similarly to the above term loans, with a set repayment schedule and a lump sum of cash upfront. You can use three different kinds of assets as collateral for financing:. Choose one—or all three! As we mentioned before, getting a business acquisition loan is typically easier because the lender has a history to assess. But just like with any business loan, lenders will scrutinize all of the following:. However, the SBA recently made some changes that make it easier for buyers to obtain SBA 7 a loans for buying a business. This is the final count of the cost of your purchase, including all prorated expenses—like rent, utilities, and inventory.
Similarly, all patents, trademarks, and copyrights might require certain forms to get transferred to you, the new owner. This document is in case the seller is staying on as an employee.
Make sure to file this agreement if so. Bulk sale laws have to do with the sale of business inventory and are designed to prevent business owners from evading creditors by transferring ownership of the business to someone else.
Inspect All Recent Tax Returns
To comply, prospective buyers usually have to notify the local tax or financial authority about the pending sale. You should now have all the information you need to buy a business safely, smartly, and successfully. You will be able to revitalize what might have been a stale company with fresh ideas and fresh leadership.
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About Latest Posts. Priyanka Prakash is a senior staff writer at Fundera, specializing in small business finance, credit, law, and insurance. She has a law degree from the University of Washington and a bachelor's degree from U. Berkeley in communications and political science. Priyanka's work has been featured in Inc. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup. Understand why the business is for sale to determine any risks. Do your due diligence before making an offer. Evaluate the price of the business with one of three approaches: earnings vs asset vs market approach.
Secure the capital needed to make the purchase. Close the deal with the appropriate documents bill of sale, adjusted purchase price, leases, etc. Editorial Note: Fundera exists to help you make better business decisions. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone. Learn more about our editorial process and how we make money here.
Streetwise Advice: 6 Tips for Buying a Business - BusinessTown
Our Picks. Learn all that you can about the background of this company. It is advised that you do not do this alone. Hire an attorney and accountant to help out. Accountants can assist with understanding the financial background of the business , evaluate its financial statements from previous years, and determine the costs involved with its purchase. Attorneys may assist with gathering and drafting key documents. Some of these may include tax returns, contracts and leases, a certificate of good standing, and letter of intent, the latter of which is issued by the seller when a price proposal has been agreed upon by both sides.
Generally, most entrepreneurs purchasing businesses need a little extra capital. When I purchased MyCorporation, I took out a second mortgage. I also bootstrapped the purchase. Bootstrapping aside, consider other funding options. The U.
PPC's Guide to Buying or Selling a Business
Available from a wide variety of lenders, these loans often come with rates and fees comparable to traditional bank loans. Not ready to apply for a loan? There are other avenues available to fund the purchase of the business. You may use your existing personal savings, borrow money from family, or buy the business using Rollovers for Business Start-ups ROBS from eligible retirement accounts. Everything has been leading up to this moment! Work closely alongside an attorney when creating this document and have them review the terms with you before signing the paperwork.
The business has been sold to you and you are now its owner. This is an exciting time.