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Buy or sell a business the right way
Illustration by Frantz Arno Salvador
Sep 04, 2012
"Easy come, easy go" is how most people would describe their various business ventures these days.
Everybody appears to have settled in for a long ride through this global economic crisis, resignedly accepting financial loss as an unavoidable pit stop. Spooked business owners are busy unloading going concerns while speculators are making hay by snapping up every business that's for sale, often taking shortcuts to hasten the transfer of ownership.
If you are the seller in a similar scenario and you aren't vigilant, you could end up selling your business for so much less than what it's actually worth. On the other hand, if you are the buyer and you neglect to do your research before agreeing to take over the business, you could end up with a lemon.
IF YOU ARE BUYING A BUSINESS, here are some steps you can take to protect yourself:
1. Make sure the business is right for you. It's very tempting to conclude a cheap sale on the spot and be able to tell everyone that you are now an entrepreneur. However, many companies have gone bankrupt simply because the owners didn't know how to run them or didn't care enough about anything but the profits.
To avoid being duped by opportunistic employees, suppliers, and even customers, consider buying a business only if it's something you are knowledgeable and passionate about. If your line is fashion design, for instance, you shouldn't even think of buying an auto repair shop.
2. Consult experts. Talk to other people who own the same kind of business; you can draw on their experiences to make an accurate assessment and forecast for your business. Don't scrimp on your payroll; have an attorney and an accountant on board and consult them every step of the process. Otherwise, you could end up making irreversible and costly errors in your decisions.
3. Conduct due diligence. You need to obtain and carefully examine the seller's financial statement and records. Have your lawyer and your accountant look into the profit-and-loss records, tax returns, balance sheets, and supplier's records for the past three years as well as into the current receivables. Have the business appraised including its assets, inventory, and brand. This will provide the basis for the offer that you'll make to the seller.
There are many factors that go into determining the value of a business, but the best and the simplest indicator is its ability to consistently generate profits. However, poor performance doesn't always mean that a business is inherently unprofitable; it could simply be the result of mismanagement. On the other hand, consistently poor performance despite changes in management is a very loud alarm that you shouldn't ignore.
4. Examine the lease contract. If the business already owns the land and the building on which it stands, then you don't have to worry about this. Otherwise, make sure to have your lawyer go through the lease contract with a fine-tooth comb. If the lease contract appears disadvantageous to the lessee, ask the lessor if he would agree to execute a new one. If the lessor insists that you continue under the terms of the existing contract, maybe you should shop around some more.
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