Buying a Going Business

Sometimes the best way to become the owner of a business is to buy a going concern. If you are considering this option, most of the factors already discussed should be considered plus these additional points.

Advantages

Certain advantages may be gained by purchasing a going business.

You may be able to buy the business at a bargain price, if, for personal reasons, an owner is sufficiently eager to sell.

Buying a business as it stands will save time and effort in equipping and stocking it.

You gain customers accustomed to trading with the establishment.

Key personnel with customer following may be willing to stay.

The "good will' created by the previous owner may be a valuable asset.

 Disadvantages

You may pay too much for the business because of your inaccurate appraisal or the former owner's misrepresentation.

If the owner had a bad reputation you would inherit prejudices of former customers and, perhaps, of merchandise and equipment suppliers.

The location may be going sour.

Fixtures and equipment may be outmoded or in bad condition. Check carefully.

Too much of the merchandise or materials on hand may be old or poorly selected.

In deciding how much to pay for a going business, consider its profit potential. Tangible assets such as equipment and inventory may be important to you, but only to the extent that they contribute to future profits. If the seller is asking a large sum for the intangible asset of good will, estimate carefully how much - if anything - it will add to your future profits. Also, determine and assess precisely the cost of any liabilities you will be expected to assume. Get it in writing!

Profit Potential

You must be concerned with the future profitability of the business. Most businesses have a natural cycle. Retail stores usually have a cycle of one year. That is, each year follows the same pattern and several years indicate a trend. Certain types of heavy manufacturing companies may have up to a 7-year cycle. Try to estimate several (at least three) cycles. Thus, in some businesses you will be estimating three to five years while in another you may be estimating future sales and profits over a 25-year period. Obviously your estimate for the next two years will be more precise than your estimate for 25 years in the future. This doesn't mean you should be careless in your long range planning. It does mean your long range estimates will be more general and subject to change.

To estimate future profits, begin by analyzing the present owner's balance sheets and profit and loss statements for at least 5 years back. Going back 10 years would be even better. Many businesses have inadequate or no records, but all should have copies of their income tax returns. Sometimes even these are lacking or, more likely, very suspicious. Some businesses have been known to prepare inaccurate tax returns. Insist on seeing accurate records. If you are serious about purchasing a particular business, consider making a deposit subject to receiving accurate business records.

You want to look at many factors and ratios from this financial data. What has been the rate of return on investment? Does it compare favorably with the rate you can obtain from other investment opportunities? How does it compare with averages for other businesses of the same kind? Have sales over the years been increasing or decreasing?

What share of the market is the business obtaining within its market area? To find out requires an analysis of the local market for the particular firm in which you are interested. What is the competition in the area, the population, the purchasing power? What are the trends? What is the outlook for increasing sales?

Are the profits satisfactory? If not, what are the chances of increasing them? Have profits been consistent over a period of years? If the last year's profit was unusually high in comparison with previous years, why was it? What is the profit trend? Have profits been increasing consistently? Have they leveled off? Started to decrease? What are the reasons for the profit trend, whatever it may be? Be sure such questions are answered to your satisfaction before you buy.

Study the expense ratios. How does the percentage for each expense classification compare with the average for the trade? The availability of average operating ratios for certain trades has already been mentioned. Comparison of the figures of the business offered for sale with standard ratios will bring out any discrepancies. In discussing these discrepancies with the seller you may become aware of operating problems which will help in making up your mind how much to pay for the business, or whether to buy it at all.

You need not necessarily be discouraged from buying the business if past profit records are not favorable. Very often the reason the business is for sale is because of recent poor earnings. Examination may reveal that these have been brought about by poor management; and you may be convinced that your management will improve the situation. By the same token, an excellent past earnings' record, in itself, should not persuade you to pay a large amount for the business without further investigation.

Ask the seller to prepare a projected statement of profit and loss for the next 12 months. Such an estimate will probably be very optimistic and should be compared with your own estimate. With a detailed estimate of the next 12 months' operation, you can compute working-capital requirements for each month. Next, estimate the value of assets and liabilities as of the end of that period. Find the estimated return on investment by dividing the projected net profit by the price asked for the business. If you believe additional investment will be needed immediately to make the business run profitably, add this to the price in your computations. The highest price for the firm which brings you a return with which you are satisfied is the maximum price you should pay for the business. Thus, an estimate of future profitability will give you the basis of a logical offer for the business.

Say that you're the sort who's beginning new small business. You Have given attention to the general chances for success, and have
chosen the new business you want to establish.

What practical issues will you face in establishing your organization? How Much money will you require for beginning new small
business? Where can you obtain it? What form of business organization will you have? Where should you locate the company? (start
company tips to follow along )

The first question you need to answer is: Just how much cash will I need? But this question can not be answered until other
questions are answered and several decisions are made.

To decide how much money is Required to start a company, enter all Of your potential income and all your planned expenses on a
work sheet or form.

Even though you might feel that This Type of planning is more than You have to start a simple small business it is useful to get
started with this approach to management which puts down figures in black and white. You will find the same approach valuable
within an established business.

First, estimate your sales volume. This will depend on the total Quantity of business in the region, the number and skill of
competitors now sharing that business, and your own capability to compete for the consumer's dollar. Obtain assistance in
producing your sales estimate from wholesalers, trade associations, your banker, along with other business-people. A number of
business and statistical books may be useful in making sales volume estimates.

In reaching your final estimate of sales do not be over-enthusiastic. A brand new business generally develops slowly at the start.
Should you overestimate sales you are likely to invest too much in gear and first inventory, and devote to thicker operating
expenses than your real sales volume will justify. Since you are just beginning you may have no sales for the first couple of
months. At any rate you may expect your first few months to be quite low.

You must also decide what percentage of your sales will be cash And what percentage will be offered on credit. If you estimate
that a certain part of the earnings are going to be on charge then you must figure when you are going to have the money for all
these sales. 1 month? 2 months? More? Never?

In our guide to starting new small business, estimate how Much cash will be paid out. Remember that in starting a business you
might be purchasing gear, paying licenses and fees, which makes deposits on rent, utilities and so forth, several months until you
open the door. A few of those expenses are simple to estimate. In case you've opted to lease a building (more about this later)
then you know what your deposits will be and just how much you'll need to pay out each month. You can probably get the expense of
fees, permits and utility deposits with a couple of telephone calls.

Other cost figures may take a little more work for you. One way Is to acquire average operating ratios for the kind of business in
which you are interested. One of the sources for such ratios include Dun & Bradstreet, Inc., trade associations, publishers of
trade magazines, technical accounting firms, industrial companies, and colleges and universities. The typical ratios for your type
of company multiplied by your estimated sales volume will serve as bench marks for estimating the several items of expenditure.
However, do not rely exclusively on this way of estimating each cost item. Verify and modify these estimates through investigation
and quotes in the particular market area in which you plan to operate.

Do not forget to pay yourself too. You may need money to live on if You have to quit your job. If your partner is working and may
encourage the family for a while you may not need to withdraw money from the business. The more time you can go without taking
money out, the quicker you'll develop a solid cash position. Now you've estimated your cash receipts and expenditures, write down
the amount of cash you'll put in the business to begin. This goes on line 1 at the example below. Next, add lines 2 and 1 for the
first month to find line 3. Then add up all of the expenses to find 5. Subtract line 5 from line 3 to find line 6. This money at
the end of month 1 then goes to line 1 to the beginning of the next month, etc.

Should you continue this for the entire year, very soon you will find You've got negative numbers or a negative cash flow. About
this time you'll also realize that you should be operating on this form with a pencil that has a fantastic eraser.

In this overly-simplified case, you notice that by the end of June you are minus $200 in money. Two options can be tried - reduce
your buys in June by $200 or begin with $200 more. You might not be able to reduce expenses (they will likely go up as your
company starts). That means you'll need to put in $200 more to start with. If all you've got is $4000 then the extra $200 you need
is funding you must get from someplace else.

Do not be misled by this simple illustration. Many small businesses Begin with the $200, and try to acquire the $4000 from
somewhere else. Since a Major reason for failure in the first stages of a company is Under-capitalization, be very careful in your
planning at this stage. You can Almost always aim on some unexpected expenses and a few flaws in anticipated income.

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