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        To Start a New Business OR Buy an Existing Business or Franchise.



        Another AHBBO Article
        Buying Your Freedom

        ?2014 Elena Fawkner

        If you're reading this article, it's probably because you're one
        of millions of people who dream of breaking free of indentured
        servitude to make it on your own in a business of your own.

        When it comes to making the break from the paid workforce
        to business ownership, you basically have two choices: to
        start a new business from scratch (often in your basement
        during the wee hours since you have to continue to work
        full-time in your Just Over Broke J.O.B. to pay the bills until
        your business gets off the ground) or to acquire an existing
        business.

        In this article, we look at the advantages, disadvantages,
        traps (and how to avoid them) and issues to be borne in mind
        when buying an existing business.

        ADVANTAGES

        There are many advantages of acquiring an existing business
        rather than creating one from the ground up, including:

        => Less Risky

        If the business has been around for a reasonable length of time,
        it's survived the dreaded first cut - that alarmingly high proportion
        of new business ventures that fail within their first couple of
        years.

        => Proven Concept

        One of the most nail-biting parts of starting a new business
        is the worry that, while you THINK your idea will fly, you're
        really not sure until it's time to leave the nest.  Acquiring an
        existing business should give you comfort that the idea behind
        the business works.

        => Existing Customer Base

        Without a doubt one of the most difficult, expensive and time-
        consuming duties of a new business owner is cultivating a
        customer base.  When you acquire an existing business your
        customer-base is ready-made and you can hit the ground
        running.

        => Predicting Future Growth

        An existing business has a track record.  You can review
        profit and loss reports, prior year tax returns and other financial
        information to see how the business has developed over time.
        This gives you an informed basis from which to predict the future
        growth of the business.

        => Reduced Need for Working Capital

        With an established business you have immediate cash flow
        from the business's existing revenues.  This means you only
        need enough working capital to meet day to day requirements,
        not a great wad of cash to see you through the first slow,
        painful months until you start generating cash which is invariably
        the case with a startup.

        => Existing Suppliers

        Just as an existing business comes with a ready-made customer
        base, so too it comes with a ready-made supplier base and
        history of dealings.  These suppliers will be keen to retain your
        business and so you will probably save a lot of time and expense
        that you would otherwise have had to expend to sort through
        competing supply terms.  Existing suppliers are more likely to give
        you a good deal off the bat.

        => Capital Raising

        Obtaining finance will also be less difficult (note I didn't say
        easier!) since you will be able to point to a track record.


        DISADVANTAGES

        The main disadvantage of an established business compared to
        a start up is cost.  At first blush, acquiring an existing business is
        more costly than a startup.  Over time, of course, it may turn out
        that a startup is a much more costly venture, especially if that
        startup venture fails.


        ISSUES

        Assuming that you decide an existing business may be for
        you, what do you need to think about?

        => Deciding on the Type of Business That's Right for You

        This is a very personal decision and will depend on your answers
        to the following questions, among others:

        * Why do you want a business as opposed to a job?
        * What special skills and background do you bring to the table?
        * What is the nature of your work and/or business experience?
        * What are your hobbies and special interests?
        * How much can you afford to invest as a downpayment?
        * How much money do you need to generate to meet your living
        expenses?

        => Finding the Business That's Right for You

        Once you've decided on the type of business that you want to
        acquire, it's time to start the hunt.  The most efficient way is
        to engage a business broker.  Most vendors of businesses
        list their businesses with brokers rather than attempting to find
        buyers themselves.  For this reason, you'll most likely find that
        the business that's right for you is listed with a broker.

        You could, of course, also directly approach the owner of a
        business you're interested in buying to see whether there is any
        interest in selling.  Depending on whether you're in a buyer's or
        a seller's market, you may put yourself at a negotiating
        disadvantage by doing this.  Only make such an approach in a
        buyer's market.

        => Financing Your Business Acquisition

        Probably the biggest hurdle you will face is getting finance for
        your small business acquisition.

        Here are your basic options:

        * Vendor Terms

        Sometimes a vendor will be willing to sell you the business on
        terms.  For example, a 10% downpayment followed by future
        payments from the cashflow of the business.  The vendor will
        usually retain a lien over the assets of the business until the
        purchase price is paid in full.

        * Loans

        There are various sources of loans.  For small businesses, your
        best bet is probably not the major financial institutions.  Try instead
        loans guaranteed by the U.S. Small Business Administration (or
        the equivalent in your country if outside the U.S.) and community
        banks.

        * Third Party Loan Guarantees

        If you're short on security, consider the possibility of a creditworthy
        friend or relative acting as surety.

        * Credit cards

        Credit card financing should generally be treated as a last resort
        but utilized judiciously, credit cards can be useful for cash flow
        purposes so long as the outstanding balance is paid off each month. 
        Don't use them for asset purchases though.

        * Family and Friends

        Not a good idea for everyone, but consider asking family and friends
        to invest in your business.

        * Asset Sale/Leaseback

        Another good way to raise cash is to sell an asset you have
        acquired as part of the business to a friend or relative and have
        them lease it back to you.  You free up your capital and your
        friend or family member has an asset-backed security.

        * Redeemable Preferred Stock

        A good option if your business is held by a corporation and
        you are prepared to give up ownership equity in exchange for
        capital.  There are securities issues to be aware of here so be
        sure to consult your lawyer.


        => Cashflow Considerations

        Be sure the business generates enough cashflow to cover:

        *  operating expenses;
        *  your salary;
        *  financing costs; and
        *  a reasonable return on investment.

        TRAPS FOR YOUNG PLAYERS

        If your acquisition takes the form of acquiring the shares in a
        corporation rather that a simple asset purchase, beware.  In
        these circumstances, the legal entity doesn't change, only the
        shareholders do.  This means that if the corporation has any
        undisclosed debts, pending lawsuits and the like, these can
        still be sheeted home to the corporation despite the change
        in shareholding.

        In addition to these traps for the unwary, beware also of
        overstated earnings, poor employee relations, overvalued
        inventory and uncollectible receivables.

        AVOIDING THE TRAPS

        Fortunately there is much you can do to flush out these
        hidden traps before you commit yourself.

        => Get Professional Advice and Assistance

        First and foremost, do NOT attempt to acquire a business without
        the professional assistance of your lawyer and accountant.

        => Contractual Indemnities

        Your lawyer will not doubt try to include provisions in the purchase
        and sale agreement whereby the vendor indemnifies you for any
        liabilities accruing prior to the dale of sale.  The effectiveness of
        the indemnity as a protective mechanism depends on the solvency
        of the vendor.

        => Due Diligence

        The best way to protect yourself is to educate yourself about
        exactly what it is you're getting yourself into.  Your lawyer will guide
        you through the due diligence process which is nothing more
        mysterious than asking the right questions and making sure you
        get the right answers.

        Here's a checklist of things that your lawyer will help you do
        during the due diligence period:

        *  Find out why the seller wants to get out of the business.
        *  Review operating information.
        *  Review all contracts to ensure there are no hidden liabilities.
        *  Get a list of all the assets being sold including fixtures and
        equipment, patents, copyrights, trademarks etc. and make sure
        they are free of all encumbrances.
        *  Get a schedule of all the debts of the business that you will
        be assuming.
        *  Check the company's articles, bylaws and corporate minutes
        to ensure the company is what the vendor says it is.
        *  Check to ensure the company is in good standing.
        *  Get a list of shareholders as well as any special rights, stock
        transfer restrictions and pledges that may exist against the
        assets of the business or the stock.
        *  Check all financial documents including bank statements,
        audited financial reports, and bank and financing agreements
        to ensure there are no undisclosed security interests.
        *  Physical inventory and inspection of all assets.

        Acquiring an existing business is a major undertaking and one
        which must be accompanied by competent, professional advice.
        Assuming that you complete thorough due diligence so that
        you understand EXACTLY what you're acquiring (liabilities as
        well as assets), you may well find that despite the funds you
        invest, it's the most cost-effective way to go!

        _________________________

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        ** Reprinting of this article is welcome! **
        This article may be freely reproduced provided that: (1) you
        include the following resource box; and (2) you only mail to a
        100% opt-in list.

        Here's the resource box to use if reprinting this article:

        Elena Fawkner is editor of Home-Based Business Online. Best business ideas and opportunities for your home-based or online business.

        Copyright 1998-2017, AHBBO.com. All rights are reserved. Tuesday, 26-Jan-2021 03:12:44 CST

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