Factors to Consider When Buying a Small Business

Are you looking for buying a small business? You are in right place, please read this article carefully here you will find some most important factors to consider when buying a small business.

The buyer of a going concern is typically presented with assembled personnel, inventories, physical facilities, established banking connections, ongoing relationships with trade suppliers and so many other facilities connected.

Small enterprises of various financial & operational statuses are usually available for the purpose of buying, such as the under:

Buying a small business

  1. Buying a profitable SB (small business),
  2. Buying a share of a profitable SB,
  3. Buying a losing/failing SB. and
  4. Buying a bankrupt/ closed SB.

Existing SBs are found to be on sale in any of the aforementioned statuses. The first category appears to be the best but it will require the highest marker purchase consideration.

As such, entrepreneurs with sufficient resources and the ability to undertake to manage the same may come forward to buy these units.

Persons with relatively lesser financial capacity who may not like to be involved in the task of imaging the unit usually opt to buy a share of an existing enterprise.

The last two types of existing enterprises for sale may require a much lesser amount of purchase consideration.

Apart from finance, inks are not ordinarily wanted to buy by the common people but those with proven experience of such an enterprise with aggressive capacity may approach to buy these units. All the SBs for state are are not demanded by all – there are different rent buyers of different rationales.

Evaluate All Opportunities for buying a small business

A buyer should evaluate all opportunities that are available. The old adage still applies, “Let the buyer be aware” It is assumed that the buyer has evaluated and investigated all the activities of the available opportunity.

The final decision has supposedly been made after careful consideration and analysis of all actions and activities of that opportunity. The following may be used as a checklist in evaluating a business opportunity.

Many of the factors involved in choosing a business are personal ones. The desirability for any one business is particular to any given individual.

The type and size of the business are sensitive personal factors, as well as being limited by available financing. In choosing a business, either as an existing business or as a franchisee, it is important to properly evaluate the business opportunity.

The evaluation of any business is the crucial stage prior to the actual opening of that business. The prospective owner faces the dilemma of determining fair costs associated with reasonable profitability for a particular business. Such an evaluation should cover the following points:

1. History of the business and its related industry.

2. Business profit, states, and expense figures; past and projected (five or more years back; one to three years in future)

3. Image and goodwill of the business under sale

4. The reason for the sale:

  1. Owner’s health and age
  2. Owner’s interest in another business
  3. Accept an extremely attractive employee position elsewhere
  4. Discouraged by labor troubles
  5. Discouraged by the high rate of taxes
  6. Expiration of a vital patent/ Franchise
  7. Loss of customers,
  8. Owner’s family
  9. Profitability
  10. Bankruptcy
  11. Moving to a better climate
  12. Location
  13. Obsolete merchandiser inventory.
  14. Poor management

5. Determine what is being bought;

  1. Assets
  2. Liabilities
  3. Replacement value

6. Other areas of concern

  1. Location
  2. Parking
  3. Licenses
  4. Merchandise line.
  5. Employees
  6. Liquidation

The successful completion of an analysis of these guidelines will require time and effort, but such an investment will highlight the danger and obstacles to becoming successful as a business owner. 

Circumstances when to Buy?

1. When an entrepreneur has no firm business idea but has organizing and management ability.

2. When the business climate is poor, the economy is not favorable, and the costs of penetrating the hick market are too high.

3. When the interest rate is too high and most people prefer to leave money in the bank or buy a second mortgage.

4. When there is a business for sale, as long as the entrepreneur can be sure that he or she is financially capable of undertaking the risk, and the reasons for the business being sold are general) caused by:

  • The death of the proprietor
  • Poor health
  • Poor management
  • The inability of the business
  • Family problems
  • The owner-manager retirement.
  • Disagreement among partners. 

Check Tax Angles

The purchase of an existing business also presents tax problems. Questions of this type are quite technical, so the prospective buyer should check all possible tax considerations with a tax expert.

Many other um angles require checking by a tax expert. These include the following:

1. Tax-deductible items – Interest expenses connected with the installment purchase of business assets may be tax-deductible. The same is true of payments made by the buyer to the seller in the return for die seller’s agreement not to engage in direct competition for a specified period of time.

2. Payment of property taxes – Property taxes are the obligation of the titleholder of record at the time the tax is imposed. Therefore, the purchase agreement should require the prorating of this tax between buyer and seller.

3. Payment of dividends – In buying capital stock and taking over a corporation intact, the buyer must pay taxes un future dividends paid from the accumulated surplus existing and acquired at the time of purchase.

Items to be included in a complete buy/sale agreement

The agreement of buyout should contain all the essential items in order to avoid any lapses for which the new owner may face problems in the future. In order to be complete, a buy/sale agreement should contain the items:

  1. List the names of the individuals or businesses involved in the buy/sale agreement.
  2. Indicate the method of purchase, such as cross-purchase, stock-redemption, or a combination of the two.
  3. Explain from where money will come to purchase the departing owner’s portion of the business; business funds, insurance, notes, loans, or corporate funds.
  4. Explain how to modify or terminate the buy/sell agreement, indicating the laws under which the buy/sell agreement is being made.
  5. State whether for tax consideration, some thought should be given to using an installment purchase plan.
  6. State whether the buy/sale agreement will have a required transfer of interest, a choice of a remaining owner, a choice of owner’s estate, or a right-of-first-refusal inclusion.
  7. Indicate if the buy/sale agreement will be contractual or optional.
  8. List each partner as a particular portion of the business with a stipulation that no liens or encumbrances are or will be placed on his or her part of the business.
  9. State the price and how to evaluate the price of the business,
  10. Name a trustee, if any.
  11. State what item will be sold or transferred to the remaining partners or stockholders.
    1. As part of the succession plan, the buy/sell agreement is an aid in the smooth and continuous operation of the business while it is being transferred from one owner to another.
  12. Evaluating an existing Business

There are various outside experts who can aid the buyer in evaluating, negotiating, and closing a business purchase.

Closing the Deal

After buying a business you need to close the previous business. Some of the most common reasons are :

  1. An impatience to get started.
  2. Insufficient funds to carry on expensive market studies or even much personal observation.
  3. Lack of training and skill to undertake an adequate business opportunity investigation. The preliminary consequences of inadequate investigation and planning are :
    1. Poor business location.
    2. Unplanned or ill-planned distribution procedures.
    3. Working capital shortage.
    4. Inadequate sales potential.
    5. Crushingly strong competition.

The ultimate consequence to be expected is business failure. Hence, we must reemphasize that a prospective entrepreneur must investigate adequately and carefully before inaugurating a new small business.

The buyer must be thorough about the industry to which the unit belongs, its operational mechanisms, customers, employees, etc.

A lawyer who has previous experience in preparing such an agreement may help the buyer with the legal implications of the terms of the agreement, especially the financial implications.

This apart, an experienced accountant may make study the assets & liabilities, earning ability & implications of the liabilities.

As such, the buyer can be assisted in the deal as shown in the Chart presented:


Figure showing the involvement of the buyer with the accountant & the lawyer in closing the deal

Suggested procedure for investigating a potential buyout Investigation of a potential buyout should be a team effort, involving the buyer, a lawyer, and an accountant.

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