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Small Business Startups

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 business 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 assets.

3. Contracts and legal documents of the business: When purchasing a business you should assess all the contracts entered by the business 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, 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 the 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 business.

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 business 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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