If you want to own your own business, it is easier to buy an existing business than it is to start you own business from scratch. An established business allows you to skip past the startup phase entirely, which is where 50 percent of all new businesses fail. If you buy a business then you can concentrate your efforts on making the business larger and more profitable.
Buying a business does not have to be a challenge. You want to avoid overpaying for the business or buying a lemon. The easiest way to avoid this is to follow these three steps in buying your own business.
STEP 1: Due Diligence
The first step is due diligence where you determine whether or not this company is one you want to buy and at what price you are willing to pay for it. Find out why the seller is selling the business. This may involve talking to the employees, suppliers, and customers. Once you are satisfied that the reason is not to flee from something negative that you will be inheriting, you can do further due diligence.
Your examination of the company will start with analyzing the last three years of financial data. You should uncover any pending lawsuits, relationship with supplier and customers, intellectual property rights such as copyrights or patents, and any potential liabilities.
STEP 2: Make Offer
There are formulas that are commonly used to value a business and this should be the starting point to determine how much to offer. The value needs to be adjusted to account for any information uncovered during the due diligence period. Having an accurate picture of the value of the business will help you to decide whether or not to proceed and the maximum price you are willing to pay. Once you have arrived at a price you present the seller with a letter of intent. This letter of intent will detail the price and terms in which you will purchase the business. Once both parties agree, a purchase and sale agreement is drawn up for both parties to sign. The purchase and sale agreement can be several hundred pages long because it itemizes every aspect of the sale. This step usually involves hiring an accountant and a lawyer to assist you in the process.
STEP 3: Arrange Financing
The last step in buying a business is financing. There are many sources available that you can tap to put together the financing. These sources include family, friends or banks. Whatever the source of funds, lenders will have requirements that you will need to meet in order to be approved for the funds. They will require you to have enough money available for the down payment as well as have enough adequate working capital to maintain the business. You can either pay for the closing costs out of pocket or arrange to have them included in the amount that you are financing.
Owning your own business is something that many people dream of accomplishing. Buying a business is one way to make this dream come true. If you follow these three steps you will be on your way to owning your own business.
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