Your Guide to Buying an Existing Business

Wanting to own and run a business but you don’t have the patience, energy, and time to build one from scratch? Buy an existing business. Many of my Brisbane bookkeeping clients came into the business by buying it from the startup entrepreneur or as a franchisee.

Advantages and Disadvantages of Buying an Existing Business

Acquiring an existing business will save you all the troubles of starting a business from scratch. The business will come with established customers, trained employees, needed business infrastructures and leases, and systems and processes that worked. Risks are reduced, operation is ongoing, and business is already generating income. Assets might also include valuable legal rights, copyrights, and patents.

On the downside, purchasing an existing business would require higher startup capital. As everything is in place, the new owner will have to pay for it at once. Unlike when you are building the business and costs are dealt with as they come. Also, incoming assets might not be as current – obsolete inventory, early model computers, building needing repairs, employees to be trained, and vehicles needing replacements. Business processes could also be outdated – are they still using snail mail newsletters and paper-based bookkeeping methods? You might get stuck with uncooperative employees who are not too happy with the new management.

Things to Consider when Buying a Business

By doing your homework, you can make franchising or buying an existing business work for you. Here are important considerations when buying a business;

Inventory – Have the inventory thoroughly examined and appraised. Inventory will be your most liquid asset and the initial source of your income before you can manufacture or purchase another set of goods for sale. What conditions are they in? How old are they? Are they salable? Use inventory as a negotiation point when setting the purchase price.

Financial Statements – Procure at least five years of financial statements to examine. If the business has been operating for less than five years, get the entire business records. Have a licensed and accredited accountant or bookkeeper in Brisbane to review the statements. This is how you will determine the book value of the business, its earning capability, and return of investment.

Sales History – It is important to review the sales records of the business you are buying. Many businesses are not intended to last for more than five to ten years, especially industries with high growth and revolution rate. Evaluate the sales movement, cycles, and pattern of the business. Be wary of businesses having a downward trend on sales. Determine the reason behind the changes – is it a competitor, absence of marketing, or a replacement product introduced into market?

Accounts Receivable – Review the profile of the accounts receivables. How old are they? Is it scattered to many small customers or few big accounts? Are they active customers? Check into the creditworthiness of the biggest accounts. What is the norm AR turnover of the industry? How much of the ARs are technically bad debts?

Other Assets – Evaluate and appraise all assets included in the sale. Furniture, building structures, business infrastructures, vehicles, equipment, leases, sales contracts, copyrights, patents, and trademarks.

Liabilities – Business liabilities also come with the purchase. Know how much liabilities you are buying. When are they due? Are there any collaterals? What kind of interest rates do they have? It is advised that a Brisbane bookkeeping company examine liabilities, liens, and any unrecorded claims against the assets of the company.

The Industry – Aside from just examining the business, learn the industry it is in. Is it a growing, declining, or a steady industry? Will you be able to cope with its business processes? Do you like being in this type of business? A natural in the fashion and clothing industry could be totally lost in the food business.

These are just the basic considerations when buying a business. You might need to look into other factors depending on the industry and the circumstances of the business you are buying.  It is always sensible to get professional help in evaluating the profitability, growth potential, and the value of the business. Lawyers, accountants, and bookkeepers in Brisbane can help you start a business with a good buy.