|
Look Before You Leap: Things to Consider Before You Buy a Business
If you are considering business ownership, there are, no doubt, a variety of different small business opportunities ideas for you to consider. These days you can choose from online businesses, franchise opportunities, an existing business for sale, starting your own business, or even MLM (multi-level marketing.) It is usually best to research all the small business opportunities at your disposal so that you can decide which option is best for you. Some people, however, find that it is easier to buy a business that is already in existence.
Starting your own business means starting from the ground up, but when buying an existing small business for sale, you have the luxury of being able to check out the history of the business before you invest your money. If you decide that you want to purchase an existing business, there are a few things that you need to keep in mind.
Is it a Good Investment?
First, you will need to take a close look at all the small business opportunities to make sure that they are good investments before investing in one of them. This, of course, takes research. Luckily, the Internet makes researching a breeze, providing you know what information you’re looking for. It will be important to check out the history of each company, the competition that each company has, the future potential of each business for sale, and the current status of each. Checking out the infrastructure of each company is important as well. Be sure that you consider the employees, the customers, the suppliers, and even the equipment that will come with the company. If you plan to buy a business and the company seems to revolve around the current owner, you may want to think twice before you buy as some customers may choose to leave with the previous owner.
Determining the Value
Once you have done your homework and decided a certain business opportunity is a good investment, you will need to determine its current value before making the actual purchase. Remember, it is not necessarily just the asking price that determines what the business is actually worth; in fact, the asking price may be higher than you care to consider. Many times business owners tend to factor in all their hard work when they set a price for the business, forgetting that it is the market value that is most important. You should never just pay the asking price. Instead, you must figure out what the real value of the business is before making an offer.
When determining the value of a franchise business, or a business for sale by its owner, there are a variety of different things that must be considered. One great formula that can help you assess and estimate the value of a business opportunity is the Owner Benefit formula. This formula adds up the pre-tax profit, the owner’s salary, additional owner’s perks, interest, and eventual depreciation. Once you figure this out, you can figure that the business will sell between one and three times of the figure you come up with. If you add all these factors together and come up with $200,000, then expect the business to sell for somewhere between $200,000 and $600,000. Make sure that you use these figures and study the overall market as well so you can come up with the right value of the company.
Getting the Financing
Another concern and consideration is getting financing. Few have the money up front to purchase a business outright; meaning some type of financing is usually necessary. While it is best to figure that you will need to pay anywhere from 20-50% of the cost up front, rarely will you have to pay everything out of pocket. There are actually a variety of different ways to get the financing that you need in order to buy an existing business for sale.
Seller Financing – One very popular type of financing, providing you are purchasing an existing business or business franchise, is seller financing. When sellers (or franchise business providers) are willing to provide a portion of the financing, it can be a significant clue that the business is worth investing in. Generally, you can expect sellers to provide between 40-50% of the financing. You, then, would be responsible for the remaining balance. One of the best points of such a loan is that you do not have to use any of your personal assets as collateral. The business itself will act as the collateral for the loan.
Small Business Association Financing - While the SBA does not actually give out loans, they do help people get the loans they need by guaranteeing them. While there are some good points to using a SBA loan to help you buy a small business for sale in USA, there are a few drawbacks as well. One of the biggest drawbacks is that it can be extremely hard to get approved by the SBA. More than likely you will need to find a different way to finance your business, but it is an option to consider.
Commercial Lenders – Getting loans from commercial lenders can be another way to finance the business opportunity you wish to purchase. There are many different commercial lenders out there so research your options (and the lender’s interest rates) before making a decision. When borrowing from a lender, however, you will have to go through a qualifying process and pay a down payment. Before you apply for this type of a loan, you will want to be sure that your own finances are in order and that your credit report is looking great. Even the best small business opportunities require financing of some sort, so your research in this area can be vital.
If you want to start your own small business, buying one that is already in existence is usually your best choice. While there are many things to consider before you buy any small business for sale, you will at least have a point of reference and a history to look at, which can help you determine whether or not that particular business opportunity (or franchise business opportunity) will truly be a great investment.
|
