Saturday, March 31, 2012

Buying Existing Business

An alternative to organizing a business from the ground up is to purchase an existing business. Many entrepreneurs prefer this method of becoming small business owners.  I will give you some advantages and disadvantages of purchasing an existing business.  The following are some reasons that buying a business may be an attractive alternative.
Reduction of Risk: Uncertainty about the extent of consumer demand can be eliminated to a certain degree by examining past results of an existing business. Therefore with, with proper investigation, the risk associated with purchasing a small business should be less than with a business started from scratch.  
Reduction of Time and Set-up Expenses: In an existing business, physical facilities such as building and equipment are already in place. The product or service is already being produced and distributed. Financial relationships and other important contacts have also been established. Each of these areas not only takes time to plan and organize, but can be costly if unforeseen circumstances arise. Examples of such circumstances include lack of demand for the product or service, construction problems, production difficulties, and legal complications. Purchasing an existing business can minimize these potential problems.   
Reduction of Competition: Purchasing an existing business can eliminate a potential competitor. This motive may be an especially important consideration in a fairly stable market with only a few well-established competitors. Breaking into such a market with a totally new business may be difficult, and the potential small business owner should investigate the possibility of purchasing rather than organizing.  
Capitalization of Business Strength: Often a business for sale has a competitive strength that would be difficult to duplicate with a new firm. For example, the location of the business, a very important consideration in the retail and some service industries, may be excellent. Personnel, technology, or even the physical facilities of the business may be superior to those of competing firms. In such situations, buying a business that offers these advantages may be an attractive alternative.
Possible Assistance from the Previous Owner: The previous owner may be willing to work for the purchaser of the business, or at least provide some assistance for a short time following the purchase. This type of help can be invaluable to the owner.
 Easier Planning: Financial and market planning for a business is much easier when historical records are available. This information is not available for start-up business. When approaching lenders or investors, projections from actual results of an existing business may generate more confidence than untested estimates.

A prospective purchaser should also be aware of the potential disadvantages of purchasing a business. Many of these problems concern the condition of the assets and other aspects of the business. 
Physical Facilities: The building and equipment may be old, obsolete, or below current standards. In addition, they may not be completely paid for or may have charges or liens against them. If the prospective buyer is unfamiliar with how to evaluate the condition of such facilities, he or she should enlist the services of a professional appraiser.
 Personnel: The business’s employees may be incompetent or unmotivated. They may also resist the new ownership and reduce their productivity or even quit once the transfer of ownership is completed. The potential buyer is well advised to visit with current employees to ascertain their attitudes towards change.
 Inventory: The inventory may be obsolete or hard to sell. This factor may be especially critical in a retail store or high-technology firm. The age of inventory can be determined through internal records or by price-tag coding.
 Account Receivable: The outstanding accounts may be uncollectible or at least costly and time-consuming to collect. An evaluation of the length of time these accounts have been outstanding can be helpful in evaluating this potential problem.
 Financial Condition: The financial health of the business may be deteriorating or less positive than it appears in the financial statements. Always conducts an in-depth evaluation of the firm’s financial condition before purchase. 
 Market: The market for the business’s product or service may be deteriorating, or a strong new competitor may be about to enter the market. In addition, factors such as the economic state, interest rates, or government policy could adversely affect market.
 Decisions about Price: The prospective owner may have difficulty negotiating a price to pay for the business or evaluating the fairness of the listed price.

Many of the above potential problems associated with buying a business can be uncovered through a detailed investigation of the operations of the business before purchase.

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