 A
Business Of My Own...Buying and Existing Business
By Daniela Hops of Padgett Business ServicesWe
probably all think of owning a business at one time or another. For some
people it’s a life-long dream; others may be looking for freedom or to be in
control. Whatever your reasons, there are many choices available. Starting
your own, new business may seem attractive because of lower start-up costs
but that route will also provide lower revenues in the first few years. So,
you might consider buying an existing business or franchise. Then you will
benefit from some immediate advantages, such as existing customers, known
products, established suppliers, and trained and knowledgeable employees.
Before you run out and buy the business, though, be sure it is something you
see yourself part of, and liking. With an existing business all the start-up
stresses have, hopefully, been ironed out, but now you have some other
challenges. The first is your new employees. Will they like their new boss?
Will they stick around until you have learned the ropes? Depending on the
business, sometimes your customers have developed a greater relationship
with the employees than with the owner and the way your employees feel about
who they work for is projected outward to your customers. Treating your
employees well will, in turn, increase your sales.
There are a few things you can do to entice your staff to be excited about
the change of management. For instance, if the current business doesn’t have
an employee benefits package because the previous owner thought it was too
expensive, compare that expense to the cost of training new employees.
Employees are not the only concerns you might run into. When you are
researching the company, be sure to inquire about their current relationship
with their vendors. Are they paying their bills on time or is the vendor
relationship strained because the company only pays when threatened with
supplies being cut off? Also, some vendors may see a change of management as
an opportunity to increase their prices.
Be sure you find out the real reason why the business is for sale. Illness
and retirement are common explanations and they do happen, but you need to
investigate. Talk to people about it. The employees, vendors and customers
might be able to give you some insight you hadn’t thought of before.
Another business you might be interested in is an existing franchise. The
most appealing feature here is the “turnkey operation”, but it is still
important to do your homework. How is the franchisor to deal with? Is
training offered to a new owner of an established franchise and at what
cost? The top franchise opportunities require a large investment at the
front end, which is considerably more than buying another business. However,
what you are paying for is the brand, the reputation that guarantees income
from the minute you take over and a proven system that takes years, if not
decades, to establish. Some of the lesser known franchises are much like
buying a non-franchise business: however the franchisor will want to share
in your future profits. Again, you need to ask yourself what kind of
entrepreneur you are. When you buy into a franchise system, you don’t
control your business. All pertinent decisions are made by the franchisor,
which is the only way they can guarantee sameness between the franchises.
Now that you have decided whether to purchase a franchise or non-franchise
business, let’s talk about facts and figures. Know what you are getting for
your money. What is included in the asking price? The current owner should
provide you with a detailed list of assets and an estimated value along with
their condition and status regarding debts owed or liens held on them. Ask
the current owner for three to five years of the company’s financial
statements. If you are at all intimidated by numbers, this is not the time
to fake it. Have a professional designated accountant analyze them and
explain to you in detail what the numbers mean. Invest in your future by
minimizing the risk of buying a business. Be sure to contact Canada Revenue
Agency (CRA) to ensure all remittances and taxes are current. This is
especially important when purchasing the shares of an existing corporation.
In this case, you will be just a new shareholder under the same corporate
name, which won’t matter to CRA as they are dealing with the corporation.
What is the business actually worth? Find out how the seller arrived at the
selling price. Take your accountant to the discussion if most of it happens
verbally between you and the seller, as the accountant will probably think
of more detailed questions to ask. The real value of the business is not so
much what you are buying today, as what it can do for you in the future.
Remember, what you are really buying is the future profits of the company.
Be sure you consult a lawyer. Given the complexity of modern business
contracts, employment obligations, pending litigations, loans mortgages,
supplier agreements, leases, etc., nobody can know everything, and this is
not the time to save. So, a lawyer with small business experience is a
critical member of your team when purchasing a business.
Finally, you have asked all the questions, researched the industry trends of
past, present and future, analyzed the financial numbers, combed through
contracts and agreements and you are still excited about buying this
business. How does it feel? Can you see yourself as the new owner of this
business? It is now time to set goals as to where you see yourself two years
from now, five years from now and 10 years from now. Are you planning to
build it up to a big business or are you planning to run it the way it is
and retire in it? Either way, be sure you have a clear business plan
documented to keep you working towards your goals at all times, as you can’t
go anywhere if you don’t know where you are going.
Daniela Hops, Certified Management Accountant of Padgett Business
Services is a small business expert in accounting & tax preparation. For a
free assessment, please call 403.220.1570 or visit
www.smallbizpros.com
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