Buy Iowa: BUYING AN EXISTING BUSINESS
BUYING AN EXISTING BUSINESS
Buying an existing business from a sole proprietorship, a single member LLC or a partnership demands due diligence in assuring that you understand how the change will affect operations and finances. Often small business owners do not keep detailed records and the only accounting comes from the tax preparer. This situation has somewhat changed with the availability of low-cost, user friendly accounting software.
Organization questions
1. Do you expect to change the legal form of ownership? If so, how will the change affect the operation of the business? For instance, if it is currently a sole proprietorship and you expect to form an LLC, how will the addition of new LLC members impact the operations?
2. What do you as the new owner bring to the table? What will you be able to do that the current owner is unable to? What is the current owner able to do that you cannot? How will you compensate for that? How much will it add to the budget?
3. What areas of the business are now outsourced? Will you continue to outsource them or will you have them done in-house? For instance, is payroll prepared by an outside firm? Will that continue or will you take on that task?
4. Will you change the mix of the personnel? For example, if the business currently has three people working in the office including one receptionist, will you keep all or will you cut the staff to two and have those two s are the receptionist duties?
5. If the business is an LLC or a Corporation, will the managers or members of the board of directors change? How will that affect the business? What expertise will the new management add?
6. Will you use the same suppliers? If so, will new agreements need to be negotiated or will things continue as the former owner did them? If you will use new suppliers, how will that change the quality of the product or service you offer? What effect will it have on your finances?
Marketing questions
1. Do you expect to change the product/service mix by adding additional products or services, by making subtle changes in the existing mix or by removing some from the mix? Why will you make these changes? Will the changes substantially change the business niche or brand?
2. If you will make changes to the product/service mix, will you lose some of the current customer base? Will the changes help you gain an additional customer base?
3. How do you expect the changes to the product/service mix to affect your sales?
4. Will there be additional expenses incurred to make these changes? What will they be?
5. Will there be significant enough changes to the product/service mix that the promotion plan will need to be revised?
6. Does the purchase of this business include a customer list/base? How likely is it that you will be able to retain the base? For instance, are there some customers so loyal to the owner that they will not transfer to a new owner? Is it possible that the change of ownership in the business will give some customers the excuse to use other businesses? If you did not have that customer list, how difficult would it be to develop a similar customer base? In other words, how much value is in that list?
7. What changes, if any, will you make to the business that will have an effect on the competition? The promotion plan? The pricing structure? The distribution channels?
8. Does the existing business need an update in technology? Does it have a web site? Does it make good use of e-mail in its communications? How valuable would a blog be to the business? Podcasts? Do you have the skills to add these technologies or will you have to pay someone to add them? Can you afford it?
Financial questions
1. Before you make an agreement to purchase a business, you need to have a real understanding of the numbers in the financial records. Does the existing business show a profit? How many years has it shown a profit? Has the percentage of the profit to sales remained somewhat consistent? If not, why?
2. Look at the numbers from several perspectives. Are the total number of sales consistent with the average sale per customer? For example, if the records show that the business made 500 sales with gross sales of $50,000 and when reviewing the average sale, you find the average sale is $110, what explains the difference? Compare inventory records to see if there is a consistency in the amount of inventory sold and in the income produced from those sales. If there are inconsistencies, ask questions until you understand those inconsistencies.
3. Study the income produced in the categories of the product/service mix. Are there changes you can make to increase the bottom line? Are there expenses that can be eliminated or reduced to increase the bottom line?
4. Do your own break-even analysis. Is it realistic to believe that you can make the number of sales necessary to break-even and then to make a profit? Document what goes into that decision.
5. Does the current owner have debt? How much of that will you have to assume? What new debt will you incur? Can the business support that additional debt and still provide sufficient profit to make the purchase of the business seem reasonable?
For more information contact the Rural Development Center 712-623-5521 or angie@enterprisingiowans.c
Organization questions
1. Do you expect to change the legal form of ownership? If so, how will the change affect the operation of the business? For instance, if it is currently a sole proprietorship and you expect to form an LLC, how will the addition of new LLC members impact the operations?
2. What do you as the new owner bring to the table? What will you be able to do that the current owner is unable to? What is the current owner able to do that you cannot? How will you compensate for that? How much will it add to the budget?
3. What areas of the business are now outsourced? Will you continue to outsource them or will you have them done in-house? For instance, is payroll prepared by an outside firm? Will that continue or will you take on that task?
4. Will you change the mix of the personnel? For example, if the business currently has three people working in the office including one receptionist, will you keep all or will you cut the staff to two and have those two s are the receptionist duties?
5. If the business is an LLC or a Corporation, will the managers or members of the board of directors change? How will that affect the business? What expertise will the new management add?
6. Will you use the same suppliers? If so, will new agreements need to be negotiated or will things continue as the former owner did them? If you will use new suppliers, how will that change the quality of the product or service you offer? What effect will it have on your finances?
Marketing questions
1. Do you expect to change the product/service mix by adding additional products or services, by making subtle changes in the existing mix or by removing some from the mix? Why will you make these changes? Will the changes substantially change the business niche or brand?
2. If you will make changes to the product/service mix, will you lose some of the current customer base? Will the changes help you gain an additional customer base?
3. How do you expect the changes to the product/service mix to affect your sales?
4. Will there be additional expenses incurred to make these changes? What will they be?
5. Will there be significant enough changes to the product/service mix that the promotion plan will need to be revised?
6. Does the purchase of this business include a customer list/base? How likely is it that you will be able to retain the base? For instance, are there some customers so loyal to the owner that they will not transfer to a new owner? Is it possible that the change of ownership in the business will give some customers the excuse to use other businesses? If you did not have that customer list, how difficult would it be to develop a similar customer base? In other words, how much value is in that list?
7. What changes, if any, will you make to the business that will have an effect on the competition? The promotion plan? The pricing structure? The distribution channels?
8. Does the existing business need an update in technology? Does it have a web site? Does it make good use of e-mail in its communications? How valuable would a blog be to the business? Podcasts? Do you have the skills to add these technologies or will you have to pay someone to add them? Can you afford it?
Financial questions
1. Before you make an agreement to purchase a business, you need to have a real understanding of the numbers in the financial records. Does the existing business show a profit? How many years has it shown a profit? Has the percentage of the profit to sales remained somewhat consistent? If not, why?
2. Look at the numbers from several perspectives. Are the total number of sales consistent with the average sale per customer? For example, if the records show that the business made 500 sales with gross sales of $50,000 and when reviewing the average sale, you find the average sale is $110, what explains the difference? Compare inventory records to see if there is a consistency in the amount of inventory sold and in the income produced from those sales. If there are inconsistencies, ask questions until you understand those inconsistencies.
3. Study the income produced in the categories of the product/service mix. Are there changes you can make to increase the bottom line? Are there expenses that can be eliminated or reduced to increase the bottom line?
4. Do your own break-even analysis. Is it realistic to believe that you can make the number of sales necessary to break-even and then to make a profit? Document what goes into that decision.
5. Does the current owner have debt? How much of that will you have to assume? What new debt will you incur? Can the business support that additional debt and still provide sufficient profit to make the purchase of the business seem reasonable?
For more information contact the Rural Development Center 712-623-5521 or angie@enterprisingiowans.c