While buying a small business usually involves more upfront expenses, it is also less risky compared to starting a venture from scratch.
While buying a small business usually involves more upfront expenses, it is also less risky compared to starting a venture from scratch. When you buy an existing business, rather than looking at forecasts and estimates, you’re taking over an operation that generates actual cash flows and profits, has an established customer base, and hopefully a good reputation.
That said, you also need to first analyse the probability of business success and its growth potential. To ensure you do things right, here is a list of the most critical factors you need to consider.
Complete a Feasibility Study
By conducting a feasibility study, you will understand if the business you’re purchasing has a good chance of success. A comprehensive study will encompass the market, commercial and technical aspects to determine if the business will continue generating sufficient cash flow and profits, be able to withstand risks common to your niche market and remain a viable endeavour in the long-term.
During the investigative process, you might also come across new avenues that you could pursue with the business and realise untapped opportunities. A feasibility study is a crucial step in the business assessment process. If conducted thoroughly, it might be the best investment you’ve ever made.
Conduct Your Due Diligence
Integral to the success of ensuring the business you are purchasing is successful, you must collect as much information about it as you possibly can. Ensure you employ the services of an accountant to review the business financials. Plus, you will also need an attorney who will take you through the negotiation process.
Among the plethora of business documents, statements, files, and agreements you need to gather, here is a list of some of the most important paperwork that should be analysed:
- Organisational documents and a certificate of good standing
- Zoning and local law documents
- Business permits and licenses
- Business Financials including balance sheets, tax returns, cash flow statements and various other financials for the current and previous years
- Environmental regulations documents
- Contracts and leases and
- Building, inventory and equipment documents
Design a Business Plan
Viable businesses are dynamic because they can adapt to changes and expand. When you incorporate your feasibility data into your business plan, it provides you with comprehensive answers about the viability of the on-going concern and helps you track its future liquidity as well.
If the business you’re purchasing ticks all the boxes in steps one, two and three, you’re most likely on the right track. The next step is to determine whether you want to shift the business to a different location to access a new market opportunity that may appeal to you. If you pinpoint a different geographical area, you will need to assess the labour pool, the cost of doing business in that location including salaries, taxes, logistics and other factors that will have a bearing on your specific line of business.
Consider Financing Options
While there are several advantages to purchasing an existing business, it can certainly be an expensive option. Unless you have your own finances, you can dip into, or if you have a financial sponsor, you will most likely require funding to support your acquisition.
Here are a few financing solutions you can consider:
- Seller Financing – Sometimes, sellers accept installments payments directly from the purchaser. Typically the amount includes the purchase price of the business plus compounded interest.
- Venture Capital or Angel Investor – Collaborating with a financial investor usually requires relinquishing a percentage of the equity of the business. If the business succeeds, the investor shares in the profits. On the flip side, if the business fails, then you don’t have to pay the debt because your investor absorbs the risk.
- Business Loan – If you can prove the business you are buying has a strong financial history, chances are you might secure a loan. That said, while approval rates for these loans tend to be low, the entire process is also time-consuming. Plus, your personal financials play a major part in determining if you qualify and you may need to deposit a large sum in the bank as collateral against the loan.
- Line of Credit – With lower interest rates and more flexible terms, making payments becomes easier, which is why more often than not it makes sense to apply for a line of credit. Especially during the early days of your new business ownership, being able to stretch payments will provide an array of benefits.
With highly customised interest rates and borrowing limits, a line of credit from &Solved is the best bet if you’re on the lookout for a flexible financing solution that will fund your business acquisition.
Thanks to variable access to cash instead of one big lump sum, you can borrow in increments and only pay interest on the amount you borrow. For more information on a line of credit, get in touch with &Solved today. And make your dreams a reality.