Things to consider
while buying a business
An entrepreneur can start a business by starting a new business
or by buying an existing one. There are many advantages of buying
an existing business. One can get started immediately without
any delay, can get immediate cash flows from the business, there
is less risk of business failure, you get established suppliers,
customers etc. When a new business is set there is a long gestation
period for the small business assistance to settle whereas when
an existing business is purchased this time can be conserved.
This is a list of some important points that you should contemplate
while purchasing a business.
1. Inventory: Inventory refers to all materials
and supplies used for resale in the ordinary course of the business
or for providing services to the customers. When the inventory
of the business is counted and inspected, you or your representative
should be present there. You should know the actual position
of stock i.e. you should know the quantity of opening stock,
closing stock, purchases made during the year etc. You should
also carry out an appraisal of the inventory to know the actual
cost of the inventory. You should also assess the inventorys
age, quality and condition. All this information will help you
while negotiating the price of the stock with the seller.
2. Fixed assets: This includes the office equipments,
furniture, fixtures and assets of the business. You should get
a list of all the assets of the business with their name, description
and their estimated values. Then you should ascertain their
present condition, current market value and the fact that whether
the asset was purchased or was taken on lease. You should find
out the amounts spent on the safeguarding and up keep of these
3. Contracts and legal documents of the Business:
When purchasing a business you should assess all the contracts
entered by the small business
assistance and its legal impact on the business. You should
thoroughly read and understand all the contracts and agreements
of the business. A business has to enter into lease agreements,
sales contracts, and contracts with suppliers etc. If the business
is having any lease you should find out the remaining period
of the lease, the terms and conditions of the lease, lease rentals
paid etc. You should evaluate all the legal documents of the
business for a better understanding of the business.
4. Incorporation information of the Business:
If the business that you are intending to buy is a corporation,
then you should check its incorporation certificate, the date
of incorporating the business, state of registration etc.
5. Accounts of the Business:
Many small business owners make use of their businesses for
fulfilling their private requirements. The business owners purchases
products and services for their private consumption but charge
them to the business; they go on holiday using the company resources
etc. You should thoroughly analyze the accounts of the business
to find out such items that are not business expenses but are
charged to the business, it will help in determining the actual
worth of the business that you are going to purchase.
6. Financial statements of the past five years:
You should evaluate and analyze at least
past five years financial statements, including all books and
financial records. You should calculate the PE ratio of the
business i.e. the price earning ratio to determine the earning
capacity of the business. You should also calculate and examine
the sales ratio and operating ratios. Then compare these ratios
to the industrys standards to assess the efficiency of the
7. Sales Data: You should review the sales
data of the business at least for the past three years. You
should break the total sales of the business by product type
and also on the basis of cash or credit sale of the products.
By doing this you can know about the current activity of the
business and you can understand the business cycles. You should
compare the sales of the business with the industrys standard.
You should also analyze the pattern of sales.
8. List of Liabilities:
You should consult and hire an independent attorney to examine
the list of liabilities of the business to determine the credible
costs of the liabilities and its legal consequences on the business.
You should find out if any asset of the business is offered
as a collateral security to secure loans etc. You should also
find out if there are any claims, contingent liabilities etc.
on the business.
9. All Accounts Receivable and Accounts Payable:
You should prepare an ageing schedule for the accounts receivable
and accounts payable of the business. You should check the age
of account receivables as if the accounts receivables show a
longer period of recovery, the lower is the value of the account
and by checking the age of the account payable you can determine
how effectively the cash is generated in the business. The credit
policy of the business should also be evaluated.
10. Marketing Strategies of the Business: You
should know the marketing strategies of the business you are
going to purchase. You should know how the business finds customers
for its products and services. You should get the copies of
all sales literature of the business and should thoroughly analyze
it. You should also know about the customer base of the business.
11. Location of the Business: You should critically
evaluate the location of the business. Location is a very important
element for retailers. A thorough analysis of the business's
location should be carried out and also of the markets nearby
the business location. If the business is a small
business assistance that provides services, then you should
know the area that is served by the business. Appraising the
location can tell about the profitability of the business as
location plays a vital role in attracting customers to the business.
These are some of the
points that should be considered while buying a business. These
points will help you to evaluate different proposals and you
will be able to choose the most profitable opportunity while
buying a business.
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