BUYING AND SELLING A BUSINESS: PART 1: Buyer’s Preliminary Considerations
Many people do not realize that our transaction practice at BPE Law includes advising and representing our clients in the purchase and sale of a business. Today we start a new Series on this important topic beginning with the all-important preliminary questions that all Buyers and Sellers must consider.
As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing me at firstname.lastname@example.org.
Also, remember that we do legal presentations for business and community organizations. If your group would like this, please contact me or Steve to setup a date and time.
BUYING AND SELLING A BUSINESS: PART 1:
Buyer’s Preliminary Considerations
By Steve Beede and Keith Dunnagan
The buying or selling of a business is a major transaction that has a large number of issues to be resolved as a part of the process. But before that transaction can begin, both a potential Buyer and the potential Seller must consider several preliminary questions that will determine everything to follow.
Today we’ll address the preliminary considerations for any business Buyer. These are:
1. Do I want to Start my own Business or Buy and existing Business. Each has Pros and Cons.
2. Do I have the skills and desire to own and operate a business
All business start from scratch at some point in time. In fact, over 540,000 new businesses start-up each month. But starting up and surviving are two different matters. Statistically, 80% of new start-ups survive the first year, but 50% are gone by year 5 and 70% are gone by year 10.
– Starting from scratch is clean. There are no hidden liabilities because the business is new.
– Lower capital requirements. The equipment and operational needs of a start-up can be minimal.
– Lower operating costs. Most start-ups are the owner and possibly a few staff.
– Lower management obligations. The owner can spend time doing the business rather than running a business
– No cash flow. Most start-ups fail because they run out of money.
– Need to build a business. Survival means bring in new business and building upon that. This may take unique skills in marketing, public speaking, management, and administration that are not natural for many people. Some statistics indicate that only 1-5% have the entreprenurial skills to start and run a successful business; 20% more can effectively manage a business; and the remaining 75% would be happy to remain as workers.
– Could take many years. Building a successful business is not an overnight project. It can take many years of long hours and dedication.
2. BUY EXISTING BUSINESS
In contrast, many people opt to “jump start” their business ownership desires by purchasing an existing on-going business. This approach, while more costly, can lead to much greater success. Statistically, the failure rate for start-ups levels off after about 5 years so the likelihood of continued success dramatically improves with an existing business.
– On-going operation. Taking over an existing business can be a “turn key” process.
– Known cash flow. With an existing business the buyer can see how the business has operated on a monthly and annual basis.
-Existing assets. All of the Furniture, Fixtures, Equipment, and Inventory needed for day to day operation are already in place. Further, the costs of these assets as a portion of the sale price can be far less than buying new or hunting for used equipment.
– Existing customers (maybe). If the business has been successful in satisfying its customers’ needs, there is no reason to expect that this would change with a new owner. However, this may not be the case with a “personal service” business or any business that is driven by the relationship between the owner and their customers.
– Existing trained staff. On-going business likely have staff in place necessary to support the operations and growth.
– On-going operation. Purchasing an existing business can also bring cons. Are there other issues involved in the business that are motivating the seller to sell? Is the market changing? Is there new competition? Will staff members be leaving too?
– Unknown liability risk. Are there any lawsuits or threats ffecting the business? As Erma Bombeck once said: “the grass is always greener over the septic tank”.
– Will transition of ownership work. Changing owners can bring a change of culture as well as disrupt expectancies of staff members
3. DO I WANT TO BE AN OWNER
As referenced above, not everyone is cut-out to be a business owner as attractive as that may sound. Again, there are Pros and Cons:
– Creating value – Ownership provides the opportunity to grow and add value to the business. This is called “creating equity”.
– Income stream plus profits. Owning a business may be the only way to generate income beyond a paycheck as a worker.
– Control of destiny. For many, especially those who may have lost a job in the past, ownership of a business means having greater control of your life.
– Self-image. Being a business owner has psychological and sociological benefits that can change your identity and your life.
– Do I have the management skills. Running a business is not a natural skill for most people. While numerous courses and publications are available to help new business owners learn about management, accounting, and the many other requirements for running a successful business, that owner must be willing to dedicate the time to learn and practice these skills.
– Doing a job doesn’t equal running a business. Operating a business means doing at least two jobs: One be “doing the business”, ie: delivering the product; and the other is running the business. These are two different jobs with separate time demands
In our next Article in this Series we’ll go over the Seller’s Preliminary Considerations:
(1) Can I Sell?
(2) Should I Sell?
(3) What will I do After the Sale?
For over 20 years, the attorneys of BPE Law Group, P.C. have been assisting our clients the buying and selling of businesses and providing guidance and representation in the administration and growth of their businesses as well as their estate and succession planning.
If you have questions concerning business, real estate, estate planning or administration, or any other legal matter, give us a call at (916) 966-2260 to schedule a Consultation with one of our experienced attorneys. If you have an immediate question on this topic, please email Keith Dunnagan at email@example.com.
This article is not intended to be legal advice, lending advice, or a specific recommendation of any particular lender or company, and should not be taken as such advice.