An entrepreneur may also choose to buy an existing business rather than start from scratch with a new venture. It is, however, important that entrepreneurs define the kinds of products or services that best match their particular skills. It might sometimes be the case that they have developed a new business idea and will then need to search for a business to buy out. The reasons for buying an existing business can be put into three broad categories:
- •It reduces some of the uncertainties faced in starting a new business from the ground up. It also saves time spent on new venture start-up but will require as much attention in either changing or redirecting the industry.
- Acquiring a business as a going concern means the market has ongoing operations and established relationships with customers and suppliers.
- There are cost savings. Some established businesses can be purchased at a price below what it would cost to start a new business.
The steps in buying an existing business are:
STEP 1: CONDUCT A SEARCH FOR BUSINESSES THAT ARE FOR SALE
There are many sources for finding companies that are for sale. The most common of these are advertisements in the smalls section of daily newspapers and magazines. Here, many businesses are listed under the heading “Businesses for sale”. Other sources are business brokers, suppliers, distributors and even bankers.STEP 2: INVESTIGATE AND EVALUATE THE AVAILABLE BUSINESSES
Regardless of the source of the lead, the business opportunity requires careful evaluation. The buyer should personally check some aspects of the business and seek the help of outside experts such as accountants and lawyers.
The following aspects need to be checked:
- Reasons why the business is for sale
- The industry
- Turnover and profitability
- Existing customers/clients and staff
- Current contracts (rental, leases, etc.)
- The business form and its compliance with relevant legislation (e.g. company or close corporation)
- The financial statements and other economic data
- Whether or not all tax returns have been submitted
- The purchase agreement, price and terms
STEP 3: EVALUATION OF THE BUSINESS
Once the investigation and evaluation have been successfully completed, the buyer must determine a fair value for the firm. Valuation of a business is not secure or exact and requires typically professional help. The primary approaches to assessment are:
• Asset-based valuation. This method assumes that the value of a business can be determined by estimating the value of its assets.
• Market-based valuation. This method looks at the actual market prices of companies that are similar to the one being valued.
• Earnings-based valuation. The estimated value of the company is based on its ability to produce future income or profits. Cash flow-based valuation. This method uses the amount and timing of future cash flows to value the business.
STEP 4: NEGOTIATE THE PRICE AND TERMS OF THE PURCHASE AGREEMENT
The valuation will give the prospective buyer an indication of what to pay for the business. The purchase price is determined by negotiation between buyer and seller. Once the price and terms of payment have been negotiated, it is essential that a written agreement of sale be drawn up by the attorney of one of the parties and checked by the attorney of the other party. This should ensure that all legal aspects are covered.
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