Consider these five steps before buying a business
There are 28 million small businesses in the U.S. that employ over 120 million people, according to the Small Business Association1. For many, owning a small business starts with creating a plan and building it from the ground up. However, buying a business may have advantages you haven’t thought of. Purchasing a business comes with numerous financial considerations, so here are five steps to consider before signing on the dotted line:
Determine the type of business you are interested in
Businesses come in many styles and structures, and each type can have an impact on the decisions and potential income you could earn as the owner. It’s important to identify the structure that works best for your skillset, interest and lifestyle. Common business options you could purchase include:
— Franchise opportunities, which offer the potential to capitalize on a brand name, track record and organizational support to help get the business up and running. This also comes at a cost, including potential ongoing fees paid to the parent company. Franchising may require you and your employees to adhere to certain standards or processes.
— Independent businesses, which must be valued based on their bottom line, assets and reputation in the marketplace. You will be able to make decisions independently; however, you’ll need to establish your own support system.
— Consulting or start-up companies, which often get launched because the current owner has a skill, product or expertise that meets a niche need. They tend to be less formal in structure, but the business could be developed into a more profitable one if it continues to grow.
Take the time to complete your due diligence
If a seller puts a business on the market, be sure to understand why. Carefully assess the value and market opportunities of the business. You should ask to review the last few years of financial statements and use them to project potential revenues and costs. Consider bringing in an accountant if you’d like an unbiased perspective. Additionally, be sure to understand what is or is not included in the asking price, such as intellectual property, real estate, staff or equipment.
Enlist the help of an experienced attorney
Drawing up the terms of a purchase agreement can be complex. Enlist a trusted attorney to vet the agreement terms and prepare legal documents related to the sale. Future success is dependent on many factors, and getting the legal aspects in order is a big one.
Develop a plan to finance the purchase
There are a variety of ways to execute a business sale, including direct or installment loans, venture capital, or paying the previous owner a percentage of future sales. Most options require cash up front as a down payment. Work with your financial advisor to identify accounts or investments you could draw down to make the purchase. Although it may be tempting, avoid dipping into your retirement savings. Your retirement could last decades, and there are no loans you can use if your savings come up short. Plus, any retirement withdrawals you make are taxable and will incur a 10 percent penalty. If you are still searching for the right opportunity, consider saving a set amount each month or investing the sum according to your expected timeframe for the purchase and risk tolerance.
Review your personal financial position in detail before making a commitment
Leaving a career with a steady monthly paycheck for one with a varying income level will likely require some adjustments to how you handle your expenses and savings. As you decide with your spouse or partner how to manage routine costs, make sure to also discuss how to continue funding important financial goals like saving for retirement or your child’s college education. Many of these choices may have tax implications, so consult your tax professional for guidance. Additionally, explore your options for health and disability insurance to make sure that you and your family maintain adequate coverage.
Many factors can affect your decision to buy a business, and a thoughtful plan is a great place to start. Talk with your financial, legal and tax professionals to make sure you are in a strong financial position to buy a business when the opportunity presents itself.