This self-paced training provides an overview of the process of buying a business and provides resources to help you decide if buying a business is right for you. Topics include how and what to research, how to determine the value, and how to transfer ownership of a business.
Duration of the course: 00:30:00
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1.3 Course Topics
This course covers areas such as:
• How and what to research about a business that you are interested in purchasing,
• How to determine the value of a business, and
• How to transfer ownership of a business.
Numerous additional resources are identified to assist you. Visit the resource icon in the course player or locate additional tools, templates, and mentors on SBA.gov when you complete the course.
Let’s get started!
1.4 Buying an Existing Business
Buying an existing business is less risky when compared to starting a new business from scratch because the business is already generating cash flow and has established customers, reputation, and employees. However, it is important that you ensure you are making the right choice in your new venture.
Even though there are steps you can take to help make the best decision, only you can determine the right business for your needs.
1.5 Deciding to Buy a Business
The first step is to decide if buying a business is the best option for you.
Let’s look at the advantages and disadvantages of buying a business. It helps you choose the best option that works for you.
One of the advantages is that you will be able to acquire possible legal rights to patents and trademarks, which may increase profitability. In addition, buying a business involves reduced startup costs and immediate cash flow and inventory.
However, the downside is that the purchasing cost may be considerably higher than the cost of starting a new business. This could be because of the initial business concept, customer base, brand, and other fundamental work that have already been completed.
There could also be hidden problems associated with the business, like hidden debts that you may inherit.
1.6 Steps to Starting
Here are the steps to start with when you decide to buy a business.
The first step is to pick an industry that you are familiar with and understand.
Next, consider your interests, skills, and experience to help you eliminate unrealistic business ventures.
The third step is to list conditions of your purchase, such as location, size, and time commitment. It is also important that you find answers to questions like “Are you willing to buy a business with multiple locations?”
After you have considered these factors, look for businesses in your preferred location that meet your requirements.
Finally, hire a business broker who finds buyers and helps you negotiate deals, prescreens businesses for you, helps you pinpoint your interest, and assists with paperwork.
1.7 Due Diligence
The next step in buying a business is to put together an Acquisition team consisting of lawyers, bankers, and accountants. The Acquisition team will be able to advise and help you address specific items before you enter into a business agreement or transaction. This process is called due diligence.
After due diligence is completed, you will know what you are buying and from whom.
1.8 Due Diligence—Initial Research
Due diligence begins with an initial research of the business that you are interested in buying. Your Acquisition team would be able to help you find answers to questions like:
o Why is the business for sale?
o How is the business perceived?
o What is the future of the business?
o Will the business stay profitable?
o And, how has the company evolved over time?
Then, reach out to business associations and organizations to ensure that there are no complaints filed against the business you are buying.
You should also speak to customers and suppliers about their relationship with the company.
If you are satisfied with the results of your initial research, then the next step would be for your acquisition team to inquire about an asking price.
1.9 Determining the Value of a Business
You should refer back to your initial research while determining the value of a business. Take into consideration factors like inventory, office equipment and property, liabilities, debts, accounts receivable, market history and reputation, and location.
There are a number of different methods that help you determine a fair and equitable price for the purchase of a business.
Some of these methods are asset-based approach, market-based approach, and income approach.
In asset-based approach, the value of business is determined based on the costs to replace the tangible assets. If the earnings will not support a value greater than the assets, then at best, the value of a business is the value of its tangible assets.
The Market-based approach forms an indication of value using ratios or factors. These ratios or factors are derived from the earnings, sales, and/or assets of past transactions of similar businesses. They are then applied to the subject company’s sales, earnings, and/or assets to derive an indication of value.
The third method, Income-based approach, derives indications of value by converting some level of earnings into a value using a capitalization rate, discount rate, or a multiple thereof.
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