Buying a New Venture

To build or to buy?-That is the question
Many aspiring entrepreneurs ask the question: Am I better off purchasing an existing business and improving it, or should I build my own from ground up? Buying an existing business can be highly profitable, but it has its own share of complications as a means to business ownership. Before buying an established business it is critical to consider its advantages and disadvantages.

Buying an existing business can be quite a deal. The current business should have everything in place to run the business; employees, equipment, established vendors, established clientele and hopefully a good reputation. As the purchaser of an existing business there is a proven track record. Additionally the business should be generating revenue. In most cases, the current owner is willing to mentor the new owner because he or she wants to see the business they developed continue to succeed.

In addition to this, the current owner has determined what works and what does not and will advise you on how to excel. If the business you are seeking to buy is being sold because of financial struggles, you can talk with the current owner to find out why, it may be something as simple as the owner is not able to commit the time necessary to grow the business. Financing is also easier to secure on an already established business, since the financial institution can look at the business’ record to determine its financial stability.

Likewise, there are also possible pitfalls to buying an existing business. One of the biggest downsides to consider is the risk of suffering from deception; it is not in the best interest of the seller to tell the buyer if something is going wrong. You are paying a price based on the value of the entire package, as shown on their financial statements. Unscrupulous individual could hide information that could work against them. In addition to having a trained staff in place, this can also work against you. Negative attitudes and employee dissatisfaction can decrease productivity and revenue.

Pros of Buying a Business

• The business is already up and running and has surpassed the start-up phase.
• The business already has existing customers.
• The business should have established a good relationship with reliable suppliers and you can immediately take advantage of the existing credit line.
• Historical data exist-the cash flows, performance data and other records of the business are in place.
• The previous owners will very likely give you the trade secrets and offer initial help and support.
• It is less risky and offers a greater chance of success than starting the same business from scratch.

Cons of Buying a Business

• Buying a business usually requires a larger initial investment as compared to doing a start-up or acquiring a franchise.
• The seller may choose not to mention or forget some important details about the business.
• Some degree of disruption in the company could occur especially if the previous owner held a critical role and influence in the administration and operation of the business.
• Gaining the trust of employees and existing clients. As the new owner, you would have to prove to them that you can run the business the same way or even better than the previous owner.

Ways to Buy a Business
There are two ways of buying a business. The first is to buy the shares in the company which owns the business. Stock acquisition involves either direct stock purchases from all the selling shareholders or a merger of two units. When you purchase corporate stock to buy a business, there is always an unknown potential liability. There is the possibility that the seller owed money to a creditor and did not disclose this information or maybe they never paid their income taxes. If you buy the stock of the corporation, those liabilities become your liabilities.

The second means is to buy the assets of the business. Because buying shares in a company can mean gaining that company’s debts and liabilities, buying the assets of a business is the preferred means. Acquiring the assets gives you the freedom to incorporate your own company to become the owner of the business, thereby enabling you to start fresh. As such, when possible, many business buyers prefer to purchase the assets of the business instead of purchasing the stock. This form of business sale minimizes the risks of contingent liabilities. When buying a company's assets, you can buy intangible assets, such as the name of the firm, customer lists, patents, trademarks, and contracts. Important to note, you can opt to not buy certain assets that you do not want. When purchasing the assets of a business, there is an implicit tax advantage to the buyer because they can increase their newly acquired assets.

Goodwill
The value of goodwill is directly influenced by the performance of the business. The sale of a business may involve a number of intangible assets such as trademarks, patents, copyrights, and licensing agreements, these can be assigned a value. The remaining intangibles including the business's reputation, brand names, customer lists, unique market position, knowledge of new technology, good location, and special skills or operating methods are goodwill. Although these factors that contribute to goodwill do not necessarily have an assignable value, they add to the overall value of the business.

A combination of advertising, research, and management talent may give a particular company an edge for which a buyer is willing to pay a high price. The ability to command a premium price for a business is the result of goodwill. Goodwill is an intangible value created by a business which may be converted into tangible value. A business' goodwill may be described as a combination of elements such as: market penetration, brand awareness, customer loyalty, size and quality of customer list, or longevity in the marketplace. In an established business the goodwill value is transferred since the vendors and customers have relationships with the business not necessarily the owners. During a transaction, goodwill may be converted into tangible value for the business owners when seeking investors, a purchaser, or a loan. When identifying and evaluating the goodwill of a business it is important to note that goodwill includes anything that makes that business unique or gives it a competitive advantage.

***Things to Consider before buying an existing business

• Is the business right for you?
• Does it complement your skills, knowledge, interests and personality?
• Will you be passionate about this business?
• Can you deal well with the type of customers and employees that the business has?
• Are you fully aware of the existing and potential problems of the business?
• Do you have a complete list of the current assets and liabilities of the company including outstanding debts?
• Have you done your own research and are convinced that the business is profitable and has the potential to grow?
• Have you checked the image of the business to its employees, customers, suppliers and competitors?
• Is the selling price reasonable? What is the current net worth of the business?
• Are you ready to go through the legal issues and processes of the acquisition?