Individuals don’t need to launch a new business to be recognized as “entrepreneurs”. In fact, purchasing a company, running and scaling it for a while, and selling it off at the end might be a better option. In fact, if you’re lucky enough to acquire a turnkey business, you can forgo the startup period entirely and get to operations as soon as a transfer is made under your name; the setup is already streamlined and ready for the new business owner.
However, buying and selling a venture is no easy feat – there’s a process to it. Even Warren Buffet advised against investing in a company that you don’t understand. To avoid situations where you could potentially face serious financial consequences, you need to fully understand the art and science of acquiring businesses and profiting from them. To that end, here are some tips.
Buying a Business
1. Know What You Want
Taking over a business is a big decision that’s going to have a significant impact on your livelihood for several years to come. So before investigating what’s out there, know what type of business you want to run (and later sell). Here are some considerations to make:
- Size: Are you planning to acquire a family-owned small business, or a large, corporate organization? Buying a more prominent company could mean greater valuation and profits, but will undoubtedly cause more stress in the acquisition and sale process.
- Location: Does the thought of “relocating” excite you, or are you looking for something close to your locality? Remember that the business location will affect corporate taxes, employee salaries, and other financials that often dictate the businesses’ bottom line.
- Industry: What is your expertise? Are you already familiar with specific sectors? Perhaps you’ve previously worked in a particular industry as an employee or a business partner. Know what you’re passionate about before making a buying decision.
2. Conduct Due Diligence
Are you familiar with the adage about the person who purchased an excellent looking vehicle only to find he couldn’t use it as it came without an engine? That could happen to you (concerning buying a business)! That’s why it’s essential to perform due diligence before making a decision. Start by studying its past performance of the business. Request and analyze the company’s financial statements for the last four or five years. Also, you’ll want to know who compiled this data; was the statement put together by an accountant, for example, or by a C-level executive?
If an accountant produced it, request documents that highlight the depth of that accountant’s analysis. You’d likely receive an auditor’s report stating that a full review has been completed, as well as a review engagement document that shows the insights of the business in the aspect of the limited review. Check carefully to ensure there is nothing under the hood. That’s important because you’ll be taking on a significant liability for things that occurred before you became the owner, so avoid leaving things up to chance.
3. Research Business Brokers
If you’ve conducted enough research and have been unlucky when it comes to finding the ideal business you wish to purchase, consider working with a reputable business broker. They’re pretty handy for pre-screening companies, and can even negotiate the terms on your behalf for the eventual acquisition. They work in a similar fashion as real estate brokers, charging a 5 to 10 percent commission on the buying price. You only pay them when a deal is done.
While the assistance of a broker may help you find “businesses for sale” that align with your areas of interest, proceed with caution. You don’t want to rush into things or allow someone to push you into a hasty decision. If you do take this route, read reviews of the vendors on Facebook, research their LinkedIn profiles, and see what people are saying in forums and other mediums about them before striking a deal.
4. Create a Sales Agreement
You’ve picked a firm, and possess enough capital to go ahead with the purchase. The final thing you have to oversee is a draft agreement. Get one made and sign on the dotted line at the bottom left or bottom right corner of the document. Make sure you have a reputable business acquisition lawyer on board, and that you’re fully aware of the terms & conditions of the deal before you put pen to paper.
Don’t leave room for ambiguities because that could result in problems at closing. In fact, uncertainties can even cause trouble after the deal is done. To ensure that you don’t end up facing unforeseen difficulties, prequalify the seller; you’ll need to look at their history, so you know the person you’re dealing with is a reputable trader. You can also request an executive summary or a more detailed profile of the previous business owner.
The summary will showcase the key features of the business, the competition in the country is situated in, and information on personnel, mentioned in paragraph form or bullet points. Analyze these carefully before adding your signatures to the sales papers.
Selling a Business
1. Have an Exit Strategy
Many entrepreneurs don’t have an exit strategy, and sometimes list businesses too late. That’s a mistake. If you plan on selling your business, devise an exit strategy when your business is healthy. Get your documents in order and make sure the company is in great shape from all ends (i.e. you’ve made the required improvements, so it’s completely attractive).
You’d also want to research market conditions and the price of similar businesses on the market. Is there a glut of demand from buyers and not enough companies on offer? That’s a hint that it’s a good time to go ahead with the sale. And if you struggle to connect with potential buyers, consider working with business brokers. They’ll act as a buffer between you and prospects. Using a broker also enables you to continue managing your operations while the broker performs the screening and prequalifies potential buyers.
2. Conduct Financial Evaluation
Wittily but actually, your company will be worth as much as you can fetch for it in the market. But identifying what the ideal selling price should be is going to be a challenge. It is in this scenario that you’d need to get your business valued. Several different valuation techniques range from future earnings to asset-backed valuations. Some companies will get a ballpark figure of their company’s worth, and compare their revenue and cash flow. Others will get a professional appraiser to put together the most accurate selling price.
Of course, there’s no correct approach recommended for entrepreneurs. The current economic situation, market price, and what other similar ventures have been valued at are all factors that should be taken into account. That said, you’d definitely need a professional valuation. While it’s legal for managers to conduct an analysis and value a business, a document put together by a reputable appraiser will be looked upon more favorably by potential purchasers and may prevent legal troubles down the road. If you’re based in the US, you can get in touch with the American Society of Appraisers.
3. Have a Clear Mind About What You Want to Sell
Before you embark on your journey of making a sale, you need to determine the assets of the company and identify what you have to sell. Establish the type of physical assets that’d be included in the sale along with the other things. Often, selling a business includes tangible and intangible assets like trademarks, buildings, goodwill, furniture, etc. The value you get for these things in terms of monetary compensation will depend on their condition.
Also, if your company is legally incorporated, you’ll need to choose if you are going to classify the sale as an “asset sale” or as a “share sale”. In the former, the seller gives away everything in the corporation other than the incorporated business itself. In the latter, the seller gives away everything, including the company that is integrated.
So, whether you still have an interest in managing the operations or not, you need to make sure the premises and inventory of your business are well-maintained, and its asset record is up-to-date. People are attracted to companies that thrive, not slow-moving ones. Careful management and using professional help are the keys to getting things in order when you’re about to list your company – as well as the keys to getting a reasonable price for the venture and seeing it off realistically.
In many instances, buying a business will require a lot of sweat equity. But once you get through the process, you’d be in a position to dictate operations and scale things further. Whether you decide to sell it in one or 5 years, make it attractive by setting up a suitable revenue model. Keep these things in mind and you’ll be in the driver’s seat for setting up a profitable buy-sell business chain that offers value to stakeholders and allows you to live a financially stable life.