SCORE is a National organization and partner of the SBA with a mission of helping people who want to be small business owners.
The Tuolumne SCORE Chapter has seven counselors who are current business owners and past corporate senior executives on staff to assist in reaching that dream. Perhaps that dream is to purchase an existing business.
Here in Tuolumne and the surrounding counties there are many existing small- to medium-sized businesses. If one is interested in purchasing an existing small business, a little investigation will show that some are for sale. Sources can be a local Chamber of Commerce, real estate firms or, sometimes, the best way is to just put the word out that you may be interested in purchasing a certain type of business.
Purchasing an existing business which is already fully operating, complete with all the components, including an existing customer base, sounds like a great opportunity.
First of all, prior to exhausting your savings or taking on debt, it is time for introspection.
• Do you have any experience in, education or knowledge of this type of business?
• Have you ever owned or managed a business?
• Are you ready to hit the ground running?
Obviously, if yes is the answer to one or more of these questions, it can increase your chances of a smoother transition.
Here are some additional questions to ask:
Do you have some type of relationship with the current owner(s)? Depending on how one knows the other it could make the business purchase process an uncomfortable one.
• Is this a hobby or are you going to rely on this income to exist?
• How are you going to finance this purchase?
The SCORE website offers a more detailed list of considerations that you should review. You can find those, at tuolumnecounty.score.org/resource/questions-ask-when-buying-existing-business.
Once you have passed this litmus test you can move on to the next steps.
The next steps consist of finding the answers to the two most obvious questions and the most difficult to get accurate answers, because the current owner(s) will have to bare their souls.
Why is the business for sale and why the “asking price”?
With the first question, you may never find the true reason. It is almost impossible to confirm. It is usually not until you have gathered all the necessary information to support, or not, the purchase decision that you can make an educated guess. But by asking the right questions, you may be able to get close. I like my clients to gather information about the following:
• Determine how long this business has been active and whether or not the seller is the original owner
• With all the new ways to market and sell products or services in our highly focused social media economy, is this business capable of competing.
Determine whether the product or service is in a growing market. If this is a seasonal business, can the revenues in the high months support the business expenses in the off season.
Inquire into the status of the business location. It is important to know for how long the current lease is active. Contacting the building owner directly will reveal the owner’s intentions for the lease and the owner’s plans for the building in the near term. To buy a business and find out later the lease is ending in a few months or the building is being sold can be catastrophic to the new business.
Ask the owner if the business has key employees and, if so, will they stay with the new business. Also, interview them yourself.
Determine the assets the company needs to operate. Inventory is carried on the books at purchased value, but the actual value of it cannot be turned into sales is zero.
Asking the competition about the company is an easy way to determine the company’s reputation.
Once this information is gathered and sorted, the reason for sale may become more apparent.
The second question, if provided with the information, is a little easier to confirm.
It is important that the current owner determines a price for the business. Never offer one up. It is an important step in negotiation. Once this number has been disclosed you can now go about confirming the actual value.
You must determine the company’s financial status. Ask for audited year-end financial statements (balance sheets, income statements and cash flow statements) for the past three years.
Ask for three years’ worth of tax returns. (If a business owner claims to have made more money than the tax returns show, but just didn’t report it, he or she may be dishonest in other areas too.)
In addition to the above, have your accountant review key financial ratios including gross profit to net sales, net income to net worth, and net income to total assets.
Determine from the financials what short- and/or long-term debt it may have.
Are there any liens against the business? Liens can be placed against a business from long-term unpaid debt and may be collected at the time of sale.
What is the ideal reason for the sale of a business?
The one, rare reason you are looking for, is the current owner has taken over this business with the long-term goal of molding and shaping it until it becomes an asset, with the goal of selling it once it is ready. Kind of like taking a fixer upper, remodeling it and placing it on the market.
Now, armed with this information you are prepared for an educated decision on whether or not buying an existing business is right for you and whether or not the particular business you are considering is a good option.
For additional information and mentor help before your purchase, go online to www.tuolumnecountyscore.org and, on the home page, click on the blue banner “Get Started, Request a Meeting”.
Steve Farrell is a community liaison officer for Tuolumne County SCORE. Contact him at firstname.lastname@example.org.