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Start-Ups

How-To: Purchasing an Existing Business

By Barbara Beauregard   |    May 8, 2015   |    10:20 AM

Many entrepreneurs think they need to come up with a golden idea to get into the game. But, there are often financially rewarding businesses that already exist that are up for grabs. If you have decided to buy an existing business, you will want to be sure you are making the right choice in your new venture. Only you can determine the right business for your needs; however, the following concepts can help guide you make the best decision. Here's how to identify a potential business to buy.

Advantages and Disadvantages of Buying an Existing Business

For most industries, buying an existing business offers less risk than starting a business from scratch. When you buy a business, you are assuming control over an operation that is already producing cash flow and profits. These businesses generally have an established customer base, a reputation in the community and employees who are familiar with daily operations. Because a successful operation has already been established, you are under the burden of setting up new procedures, systems and policies as well as marketing your business to generate a base of customers.

Playing devil's advocate, buying a business is often more pricy than starting from scratch. However, it is much easier to get financing to buy an existing business than to start a new one. Banks and investors generally see less risk in dealing with a business that already has a proven track record. In addition, buying a business may give you beneficial legal rights, such as patents or copyrights. This isn't to say that buying an existing business presents no risk. There is always the possibility of being presented with obsolete inventory, rancorous employees or outdated distribution channels.

Making the Right Choice

The next stop is choosing the right type of business for you. It helps if you're already familiar with an industry. Do research and give some serious thought as to the types of businesses you're interested in and which best match your experience and professional skills. You will also want to consider the size of business to seek out in terms of employees, number of locations, sales, and profit margins. Drilling down, you also want to consider the geographical area where you want to operate a business—it doesn't make much sense to own and manage a business in Boulder, Colorado if you live in rural Idaho. Once you have chosen a region and an industry on which to focus, you can begin investigating potential businesses to acquire. You can check with local chambers of commerce and online resources to find out which businesses are open to acquisition, but remember that just because a business isn't actively marketing itself doesn't mean it's not for sale. Take advantage of your own professional network and business contacts and it's likely that one or several good prospects will present themselves organically. If this tactic doesn't work for some reason, you can contact a business broker to find businesses for sale. These services cost more money, but they can help prescreen businesses, focus your interests, negotiate with owners and help with the buying process.

The Buying Process

Once you begin negotiations to acquire a business, it's time to start your due diligence and assembling your team. You want to examine all the licenses and permits necessary to conduct business, and look into zoning requirements and any environmental concerns. You will also need to put together an acquisition team consisting of your banker, accountant, attorney and any trusted advisors or financial or operational partners. They will help you review all the relevant information about the business you are considering and help you assess the company's potential yields and by extension, come up with a fair and equitable purchase price.

The Transition Phase

Changing owners is a significant moment for employees of a small business. After ensuring that the owner feels comfortable with the future of his or her business, spend time talking to key employees, customers and suppliers before you take over day-to-day management of the business. Getting key players involved and soliciting their feedback will make running the business in the future much easier for everyone involved. Acquiring an existing business isn't simple or easy, but with proper due diligence, good intentions and hard work, you will soon see the fruits of your labor.