Determining the value of a privately held small business for sale is far trickier than figuring out the value of a new home. One reason why: Business owners have every reason to keep profits looking low at tax time and many reasons to inflate the value when it comes time to sell.
One of the most important aspects of buying a business for sale is determining its profitability. Few people want to purchase a business that is losing money unless they have a solid plan for how to turn it around.
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Starting a new business from scratch requires more than an idea and capital. To be successful, you must build brand recognition, find a great location, have a well-thought-out business plan, and more. While starting a new business can be beneficial and profitable, you may find that purchasing an existing business, such as a franchise, has more advantages to offer. When evaluating businesses for sale, there are several factors you should keep in mind. Failure to recognize the potential pitfalls associated with these business opportunities could lead to several costly problems in the future. Consider the benefits, drawbacks, and costs to ease the decision-making process.
According to BusinessKnowHow.com, 51 percent of businesses survive five years after they are established. About 7 out of 10 make it two years. Of course, you want your business to have as good a chance as possible. For this reason, buying businesses for sale on the market can be incredibly beneficial. Business opportunities can arise from these purchases, especially if you purchase a franchise that is already functioning. Purchasing a business gives you the space and location you need to make your company strong and stable.
Buying a running business
When you buy a business that is already known and has clients, you set yourself up to succeed. You do not need to spend as much money on start-up costs when the business is already running, because the clients are already aware that your business exists. You likely will also have the ability to retain the current employees. These workers know how the business runs and can help you keep it running when you take over.
Location and style
When you purchase a business that is already established, you won’t need to deal with location problems. You won’t need to spend time discussing where you want your business to be or how you want it to be built, because this has already been completed for you. This saves you valuable time and money.
You will also not need to concern yourself with the look of the restaurant or business if it is a franchise. Many of these concerns are covered by the rules of the corporate offices, making the decoration and layout of the building nonnegotiable. Logos, advertising, and other areas of the business are often run by corporate offices even though your business is a privately owned franchise.
One of the benefits of buying a well-known business, such as a restaurant franchise, is the stability of the business’s name. A popular eatery will have traffic regardless of how new the business may be to an area. New management and new staff members often do not negatively influence the coming and going of consumers in fast food restaurants, for instance, unless there is a major upset that is known in the area. Starting a popular franchise is also a quick way to bring in income without having to advertise much. When consumers see that their favorite restaurant is reopening or opening soon, they will be waiting when you open your doors.
Exploring businesses for sale may seem like a viable approach to getting into business or expanding your current business, but there are a number of issues that you should consider before stepping into another business owner’s shoes and making any final decisions. One of the most significant issues is establishing the value of a going concern. A going concern is a business that is sold by passing the keys to the new owner, rather than liquidating and selling off the assets. Business valuation experts apply various economic models to establish the current value of a business. Any valuation is an estimate, however. You may end up overpaying for a business, which will not become evident until long after the deal has closed.
Business opportunities are rarely as simple as the person who is trying to make the sale claims. One of the most significant pitfalls in evaluating businesses for sale is the fact that the new business owner assumes any liabilities that may have existed under the previous owner. If the previous owner does not disclose outstanding or potential obligations, you may be stuck paying for them. For example, if a seller does not disclose that a customer threatened to sue, and the customer sues years after the previous owner has left the scene, your acquired business can still be held responsible for the obligation.
Inadequate due diligence
You are responsible for conducting due diligence to vet business opportunities. The legal system will not intervene if you received the bad end of a business deal because you failed to investigate the current state of affairs thoroughly. Usually, due diligence on businesses for sale is conducted by accountants and lawyers you hire to look into legal and financial matters. If you hire inexperienced professionals, you may end up responsible for any liabilities or obligations they failed to discover.
When searching for businesses for sale, the price for purchase varies tremendously based on the size of the business, its existing infrastructure, its client list, and its location. Additionally, some business purchase agreements include the acceptance of the business’s existing debt, which must be factored into the cost. Because of all of these factors, the cost to purchase an existing business can be below $1,000 for a business with no infrastructure and a small client list to more than $100,000 for an established enterprise.
Purchasing a franchise can be a relatively inexpensive way to buy an existing business. Many are less than $10,000 and often come with a proven business plan. According to Business News Daily, 10 percent of existing businesses in the United States are franchises.
You run the risk of losing a significant amount of money when you purchase businesses for sale. However, researching the current owners, getting several estimates, and developing solid contracts can help you avoid losses from bad deals. The cost of an existing business may be high, but you stand to make significant returns on the investment. With an existing structure, a recognizable brand name, and known products and services, you are well ahead of the game when starting out. If you let it be known that the business is under new management, you may be able to attract even more attention and customers.
There are several ways you can choose to make your business grow effectively including acquiring or merging with other companies to encourage new markets and meet goals. Many companies make it a habit to search out businesses for sale in an effort to broaden the company's horizons in some important ways. During an acquisition or merging venture, the parent or buying company usually benefits from the client base, employee expertise, and collateral obtained in the deal. Some companies choose to purchase other businesses similar to their own, while others make the choice to merge with companies that have something new to offer their operations and clients.
When considering which of the various businesses for sale are the most appropriate for the needs of your company, there are many factors to take into account. You may wish to have a business analyst evaluate the pros and cons of the purchase, as well factor estimates pertaining to the cost to operate the new business and how much profit you can expect to see from it. Hard decisions will also have to be made regarding the company's existing employees and whether it is most feasible to allow the acquisition to operate as normal, modify the process, or shut it down altogether.
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