Buying
an Existing Business
Purchasing
an established business can lighten the burden of start-up costs, lag time
without a salary, establishing markets, and other costs associated with the
creation of a new business. Established businesses may have existing good will
(intangible assets such as reputation or historic value).
The decision to buy a business requires careful evaluation of many
factors including pricing and financing your purchase.
The potential buyer must understand their criteria for selecting, their
motivation for wanting to purchase the business and the motivations of the
business owners.
Consideration
should be given to the following:
-
What
is your experience with the industry and/or management?
-
Does
the business match your strengths?
-
Is
the business what you enjoy doing?
-
Is
it in a desirable location?
-
What
are you willing to invest?
-
Can
you get financing?
-
What
size business do you desire in terms of sales, profit and employees?
If
the business under consideration has a product or service outside your area of
expertise, it is important to make certain that the key employees will stay
after the sale or that you can hire someone with similar experience.
Finding
a Business For Sale
Finding
a good business opportunity is not always easy.
Sources to consider:
-
Printed
advertisements
-
Trade
sources and suppliers
-
Friends
and acquaintances
-
Intermediaries
such as business brokers or acquisition specialists
-
Real
estate brokers, if there is property for sale with the business
-
Targeting
a business and inquiring about its availability
Evaluating
the Business
As
a buyer, first evaluate a business by reviewing its history and the way it
operates. Develop an understanding of the business method of acquiring and
serving its
customers, determine how it generates its sales, learn its marketing strategy,
and develop an understanding of its finance and operations functions.
Checklist
of material for the evaluation process*
To
evaluate the business and make a reasoned buying decision, the following
information (if applicable) will be needed from the existing business:
-
3-5
years financial statements
-
3-5
years tax returns
-
Interim
financial statements
-
Projections
-
Debt
schedule
-
Accounts
receivable and aging schedule
-
Accounts
payable and aging schedule
-
Details
of equipment leases and other contingent financial commitments
-
Inventory
list
-
Supplier
list (including contracts)
-
Customer
list (including contracts)
-
Organizational
charts and employee contracts
-
Copies
of all real estate, leases, or deeds
-
Industry
information to which the owners may have access
*Checklist
provided by the SABRE Group (Confidential Business Sales and Valuations of
Greensboro / Raleigh / Durham / Greenville)
Important Questions/Issues to Address
Evaluate the business’ potential
according to your goals, employer responsibilities, product or service demand,
market, and financial considerations. Ask and get answers to questions regarding
all aspects of an existing business before entering any purchase agreements. The
services of an accountant, attorney, banker and your local Small Business and
Technology Development Center counselor are recommended when buying an existing
business. Investigation and research will be crucial to uncovering as much information as possible about the business for
sale. Start with basic questions, like those listed below. Others may be
required depending on the specific business:
-
Why
is the business for sale? (Attempt to delve below the initial answer the
owner may give.) Will the owner finance a portion of the purchase price?
-
Has
it been making a profit? If not, do you have a plan to make the business
profitable? Will the business be able to pay you a reasonable salary, make
the loan payments if you are getting a loan to purchase the business, and
still make a profit?
-
Is
the business worth the asking price? (Get the help of a Small Business and
Technology Development Counselor www.sbtdc.org
or accountant help you evaluate the value of the business.)
-
Are
all of the books in order and well maintained? Have you reviewed the past
and current financial statements with the counsel of an accountant? Are
there any liens against the property for sale? Are there any claims on
inventory or equipment? Have the taxes been paid to date?
-
What
kind of reputation does the establishment have currently? How would you
change that reputation, if needed?
-
What type of customers make up the client base - a few large clients or
many smaller customers? Are they loyal because of a personal relationship
with the owner or because of the level of quality service?
-
Will
the sale include equipment, property, inventory, debts, employee contracts,
name, logo, slogans, signage, customer files, etc.?
-
Have
you reviewed existing business contracts and the effect of the transaction
on those contracts?
-
Will
the lease be transferred into your name or will the owner require a new
lease? How much time remains on the lease? (The bank may require a lease for
the length of your loan.) Is the location suitable for your plans? Are there
any environmental concerns with the location? Are there licensing concerns?
-
What
contingent liabilities exist?
-
What
policies have been established with the employees regarding work
environment, salary / commissions, benefits, vacation pay, and fringe
benefits?
-
Will
the owner be cooperative with the transition of ownership with regard to tax
issues, utility transfers, government requirements, employees, and other
procedures?
-
Are
there any environmental issues with respect to your chosen business?
-
If
you are using a business broker, remember that s/he is representing the
interest of the seller.
-
Consider
a non-compete agreement with existing owner(s).
-
Consider
a contractual arrangement with present owners for a period of consultation.
Courtesy of NC Small Business and Technology
Development Center's Business Startup and Resource Guide.
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Purchasing
a Franchise Business
Franchising
is a popular way to start a new business. In a franchise arrangement, the
provider, or franchisor, contracts with you, the franchisee, to give you the
right to sell or distribute a service or product in a particular area.
A franchise offers advantages and has disadvantages.
Advantages
of a Franchise
-
Some
require relatively small capital investment with franchise financing
-
Initial
corporate support for start-up
-
Continuous
management training and counseling
-
Existing
goodwill and brand name appeal (sometimes)
-
Standardized
quality of goods/services
-
Proven
products and business format
-
Group
purchasing power
-
Some
opportunities require no prior experience in that business field
-
Buying
power and programs
-
Development
of advertising and promotions programs (both local and national)
-
Site
analysis—help in deciding on a site based on past experience
Disadvantages of a
Franchise
-
Complicated
legal negotiations
-
Restrictions
on purchasing
-
Franchising
fees
-
Required
to share portions of business profits with corporation (sales/royalties)
-
Loss
of control over some aspects of operation (e.g., use of name/logo for
advertising, territory,uniforms, product purchasing requirements)
-
Less
freedom
-
Potential
problems if owner wants franchisor to buy franchise back
-
Limited
control over pricing, product lines, and suppliers
-
Human
resources policies may be instituted by corporation (potentially
unsatisfactory training programs)
-
Actions
by the corporation may affect business of franchisee (especially new store
locations close to yours)
Locate a list of lawyers
specializing in franchise negotiations while in the research stage. Once a
franchise opportunity has been selected, retain a lawyer for every step of the
negotiations. The negotiations serve as the foundation of the franchise.
Working with the lawyer, set
policies and agreements that will enable the franchise to thrive now and in the
future. All obligations, rights, privileges, risks, opportunities, assets, and
liabilities must be detailed and agreed upon by all parties before the contract
is signed.
The
US Department of Commerce offers a publication, Franchise Opportunity
Handbook, which is up-dated every two years. For a low cost it can be
ordered from Superintendent of Documents, US Government Printing Office, North
Capitol and H Streets NW, Washington, DC 20402. There are also a number of books
on franchising available at public libraries and bookstores.
Courtesy of NC Small Business and Technology
Development Center's Business Startup and Resource Guide.
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Joint
Ventures, Strategic Alliances, Distributorships
Starting
a business by allying with a larger company can give a new business a
significant head start. The
alliance can be in the form of a partnership of some sort or an independent
contractor relationship, with or without the larger company investing in the
smaller company.
Joint
Ventures and Alliances
The
term alliance has come to mean anything from a simple transactional relationship
between companies to supply goods or services to a licensing or outsourcing relationship
with the smaller company. This is
done for strategic reasons—both companies get what they want out of the
relationship by being bound closely together without a merger.
Larger
companies, for example, are supporting and even funding small company startup
and growth for a variety of reasons:
- As
a pipeline for the larger company to get new products and services to customers
- As
a low risk way for larger companies to try out new ideas and be more nimble
- As
a pipeline for smaller companies to provide research and development,
innovative products/services, quick response time, short term labor, etc. to
the larger company and its customers
Small
firms must ensure that their larger partners have the same intent, expectations
and vision for the alliance. If
these are divergent in the beginning, or become divergent over time,
the alliance is not likely to succeed.
Commitment of time and resources, and leadership buy-in from the larger
company are key to the smaller company’s success.
Small companies, likewise, must be able to match the larger company’s
technical and business competence to be and remain desirable fit for the larger
company.
Distributorships
Many
medium sized and some larger companies use small companies for distribution
and/or sales of their products or services.
This gives often a small company a number of distinct advantages over
going it alone:
-
Low
startup cost
-
Marketing
materials, strategies, pricing and experience provided by the larger company
-
Help
in establishing and managing a territory
-
Products/services
that have a recognizable name
-
Healthy
commissions and other incentives
With
either one of these approaches the same thinking, planning
and execution is needed as is mentioned
in the discussion of Starting a Business
on Your Own. In addition, the
small business owner must carefully evaluate the success, future, track record,
players and commitment of the larger company.
Get legal representation in negotiations and contracts with the big boys.
Courtesy of NC Small Business and
Technology Development Center's Business Startup and Resource Guide.
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Starting a
New Business on Your Own
Starting
your own business can be a very exciting endeavor. It allows you great freedom
and opportunity to explore and develop your own business idea. You must decide
what kind of business you want to start. It is also important to examine
yourself and decide what you want from the business.
Keep in mind that starting a business requires careful thought and
planning. Many aspects of the business must be considered including legal
issues, financing, marketing concerns, employee relations, accounting
procedures, equipment purchases, and location.
Research, preparation, organization, and planning are critical in a
start-up venture to minimize risk and enhance your chance for success.
You
might ask, “How do I know what kind of business to start?” or “How are
businesses formed?” Business
ideas emerge in many ways. Examples are:
- Finding
and meeting an unfulfilled market need
-
Building
a business on an existing customer relationship
-
Spinning
off a business based on your experience and knowledge
-
Capitalizing
on a new invention or technology
-
Growing
a part-time business or hobby into a full time opportunity
Consider the following approach:
-
Research
your business idea (doing a business plan is a good place to begin)
-
Develop
a strategy
-
Determine
your marketing approach
-
Address
key operational issues
-
Make
your own decisions, but get advice from appropriate professionals
Successfully starting your own business can provide a sense of accomplishment
and satisfaction in knowing you did it yourself. However, if the business fails,
you must assume all the liabilities and emotional strain that goes with it. There are many
misconceptions surrounding owning one’s own business. Consider the following
common misconceptions:
-
I
will be my own boss.
Being your own boss does not mean you can play golf or go fishing anytime
you want. Reality is, the business and your customers become your boss and
can demand 50-65 hours per week.
-
I
can get rich overnight.
Small business and free enterprise provides a great opportunity to build
wealth; however, it will take time. Studies indicate
that more than a third of small businesses that grow significantly, do so
after ten or more years of existence.
-
I
can expect immediate income from my business.
This is not likely. Generally, it takes 6-12 months before a new business
can start to pay the owner a decent salary. You should have a cash reserve
or savings to provide financial support for you and your family during the
start-up phase.
-
I
can start my business with little or no money.
Poor capitalization is one of the major causes of business failure.
Lack of capital results in negative cash flow which can result in poor
business decisions and serious credit problems.
-
I
will incorporate and use other people’s money.
Many books and articles have been written about OPM (other people’s
money). It is difficult to borrow your way to wealth as a new business. The
corporate shield probably will not protect you in case of failure.
Most banks today will require you to personally guarantee the
corporate loans for start-up businesses. Consequently, all your assets may
be at risk.
Courtesy
of NC Small Business and Technology Development Center's Business Startup and
Resource Guide.
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FINANCING
AN EXPANSION
Extended Programs
Most of the programs covered in the
start-up / small company section are also applicable to companies seeking to
expand their business. Many of the programs offer small loans but do not exclude
businesses seeking to expand from applying. Depending on the amount of financing
you need and type of work your expansion will entail, some of these programs may
be of assistance to you.
Specialized Expansion Programs
In addition to those programs, there
are programs specially designed for businesses seeking expansion opportunities.
The following section details these unique opportunities.
SBA Programs
504 Certified Development
Company Program
While the SBA is generally a vehicle
for investment in disadvantaged businesses and for start-up ventures, mature
businesses with proven cash flow and well-capitalized start-up businesses are
more often the recipients of the 504 loan program. The 504 Certified Development
Company Program provides growing businesses with long-term, fixed-rate financing
for major fixed assets, such as land and buildings. A Certified Development
Company (CDC) is a non-profit corporation established to contribute to the
economic development of its community or region. CDCs work with the SBA and
private-sector lenders to provide financing to small businesses. The 504
Certified Development Company is a channel that allows private funds, guaranteed
by SBA, to flow into community businesses.
Typically, a 504 project includes a
loan secured with a senior lien in favor of a private-sector lender
covering up to 50 percent of the project cost, a loan secured with a junior lien
from the CDC (a 100 percent, SBA-guaranteed debenture) covering up to 40 percent
of the cost, and a contribution of at least 10 percent equity from the small
business being helped. The maximum SBA debenture generally is $1,000,000 (up to
$1.3 million in some cases). The program is designed to enable small businesses
to create and retain jobs. The CDC generally must create one job for every
$35,000 provided by the SBA on each loan. There are some exceptions available
for certain projects that meet specific public policy goals.
Proceeds from 504 loans must be used
for fixed-asset projects. Applicable projects include purchasing or improving
land; constructing new facilities; modernizing, converting, or renovating
existing facilities; or purchasing long-term machinery and equipment. The 504
program cannot be used for working capital or inventory, consolidating or
repaying debt, or refinancing.
Interest rates on 504 loans are
pegged to an increment above the current market rate of intermediate term US
Treasury issues. Maturities of ten and 20 years are available. Fees total
approximately 3 percent of the debenture and may be financed with the loan.
Generally, the project assets being financed are used as collateral. Personal
guarantees of the principal owners are also required. Under the 504 program, the
business qualifies as small if it does not have a tangible net worth in excess
of $6 million and does not have an average net income in excess of $2 million
after taxes for each of the preceding two years. Loans cannot be made to
businesses engaged in speculation or investment in rental real estate. In
addition to SBA lending, some regional CDCs may have their own microloan and
revolving loan programs. You may obtain a current list of Certified Development
Companies by accessing www.sba.gov and
selecting the "Local SBA Resources" icon or calling (800) 827-5722.
Certified Development
Corporations (CDCs)
Asheville-Buncombe
County Development Corporation
PO Box 7032
Asheville, NC 28802
(828) 645-0439
sourcepro@ioa.com
Fiscal 1999: funded: 3 loans totaling $821,000 ($1,750,000 approved)
County: Buncombe
Centralina
Development Corporation
PO Box 35008
Charlotte, NC 28235
(704) 373-1233
Fiscal 1999: 28 loans totaling $10.3 million
Counties: Cabarrus, Gaston, Iredell, Lincoln, Mecklenburg, Rowan, Stanly, and
Union
Charlotte Certified
Development Corporation
5970 Fairview Road, Suite 218
Charlotte, NC 28210
(704) 442-8145
Fiscal 1999: 18 loans totaling $7.2 million
County: Mecklenburg
Neuse
River Development Authority, Inc.
PO Box 1717
New Bern, NC 28563
(252) 638-6724
Fiscal 1999: not available
Counties: Carteret, Craven, Duplin, Greene, Johnston, Jones, Lenoir, Onslow,
Pamlico, and Wayne
www.eccog.org
Northwest
Piedmont Development Corporation
400 West Fourth Street, Suite 400
Winston-Salem, NC 27101-2805
(336) 761-2108
Fiscal 1999: four loans totaling $733,000
Counties: Davie, Forsyth, Surry, Stokes, and Yadkin
Region
C Development Corporation
111 West Fourth Street, Suite 400
Rutherfordton, NC 28139
(828) 287-2281 x229
Fiscal 2000: 2 loans, totaling $691,000
Counties: Cleveland, McDowell, Polk, and Rutherford
www.regionc.org
Region
E Development Corporation
736 Fourth Street, SW / PO Box 9026
Hickory, NC 28603
(828) 322-9191 x115
Fiscal 1999: three loans totaling $1.6 million
Counties: Alexander, Burke, Caldwell and Catawba
Self-Help
301 West Main Street
Durham, NC 27701
(800) 476-7428 ; (919) 956-4773
Fiscal 1999: 39 loans totaling $14.8 million
Counties Served: Alamance, Alleghany, Anson, Ashe, Avery, Beaufort, Bertie,
Bladen, Camden, Caswell, Chatham, Chowan, Columbus, Cumberland, Currituck, Dare,
Davidson, Durham, Edgecombe, Franklin, Gates, Granville, Guilford, Halifax,
Harnett, Hertford, Hoke, Hyde, Lee, Martin, Mitchell, Montgomery, Moore,
Northampton, Orange, Pasquotank, Perquimans, Person, Pitt, Randolph, Richmond,
Robeson, Rockingham, Sampson, Scotland, Tyrrell, Wake, Warren, Washington,
Watauga, Wilkes, Wilson, Vance, and Yancey.
www.self-help.org
Self-Help
926 Elizabeth Ave. Ste. 302
Charlotte, NC 28204
(704) 409-5900
Fiscal 1999: 39 loans totaling $14.8 million
Counties Served: Alamance, Alleghany, Anson, Ashe, Avery, Beaufort, Bertie,
Bladen, Camden, Caswell, Chatham, Chowan, Columbus, Cumberland, Currituck, Dare,
Davidson, Durham, Edgecombe, Franklin, Gates, Granville, Guilford, Halifax,
Harnett, Hertford, Hoke, Hyde, Lee, Martin, Mitchell, Montgomery, Moore,
Northampton, Orange, Pasquotank, Perquimans, Person, Pitt, Randolph, Richmond,
Robeson, Rockingham, Sampson, Scotland, Tyrrell, Wake, Warren, Washington,
Watauga, Wilkes, Wilson, Vance, and Yancey.
www.self-help.org
Smoky
Mountain Development Corp.
100 Industrial Park Drive
Waynesville, NC 28786
(828) 452-1967
Fiscal 1999: 20 loans totaling $9.7 million
Counties: Cherokee, Clay, Graham, Haywood, Henderson, Jackson, Macon, Madison,
Swain, and Transylvania
Wilmington
Industrial Development Incorporated
PO Box 1698
Wilmington, NC 28602
(910) 763-0013
Fiscal 1999: 2 loans totaling $661,000
Counties: New Hanover, Pender, and Brunswick
The
Export Working Capital Program
The
Export Working Capital (EWCP) Program was developed in response to the Guarantee
Facilities also can be used to extend medium-term credit to buys of US capital
goods and services through banks in certain foreign markets.
Direct
Loan Program
The
program provides competitive, fixed-interest-rate financing for export sales of
US capital equipment and related services (usually in excess of $10 million).
The
North Carolina Small Business and Technology Development Center became the North
Carolina City/State Partner for Ex-Im Bank in 1996. As the City/State Partner,
the SBTDC markets the bank's services to small and medium-sized companies that
are ready to export. It also markets Ex-Im's programs to commercial banks,
teaches seminars, counsels exporters and banks, and may package working capital
transactions.
NC SBTDC
5 West Hargett Street, Suite 600
Raleigh, NC 27601-1348
(919) 715-7272
www.sbtdc.org
US
Export-Import Bank
Mid-Atlantic Regional Office
811 Vermont Avenue NW
Washington, DC 20571
(202) 565-3946
www.exim.gov
Industrial
Revenue Bond Program (IRB)
This
is the largest financing tool, measured by dollar amount per project, available
to the North Carolina Department of Commerce. IRBs are a source of long-term,
low-interest financing that can be used only by a company engaged in some manner
of manufacturing. The proceeds may be used only for fixed assets, land,
building, new equipment, existing equipment (in place and installed as part of
an integrated production line), architects and engineers fees, and issuance
costs. Counties make IRB financing available for qualifying projects. Such
projects include new or expanding manufacturing facilities, distribution
centers, and research and development facilities necessary to the manufacturing
process. The state supervises and approves bond applications, but the bond
authority in the county in which the plant is located issues the bonds. The
rules governing bond issuance are a combination of federal regulations and North
Carolina statutes. Interest rates are negotiated between the firm's agent and
the bond buyer.
The company
must agree to pay its employees a wage greater than or equal to 10 percent above
the average weekly manufacturing wage of the county or state. However, certain
high-unemployment counties may waive this wage requirement. It normally takes
eight to ten weeks for an application to be approved. Although there is no set
minimum, a bond issues generally needs to be for about $1.5 million to be cost
effective. Bonds can be taxable or tax exempt. The maximum tax-exempt bond
amount is $10 million in any given jurisdiction. Taxable bonds are not subject
to this limit. Approximately $89 million of the state's bond allowance of $382
million was approved through mid-2000.
NC
Department of Commerce's Commerce Finance Center
301 North Wilmington Street / PO Box 29571
Raleigh, NC 27626-0571
(919) 733-5297
www.nccommerce.com/finance/incentives/irb/
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This Web site is sponsored by the
Gaston/Lincoln County Business Development Network, an affiliation of business
service providers in Gaston and Lincoln Counties of North Carolina.
IMPORTANT!
Disclaimer: The information presented
here is intended as a public service. Although efforts have been made to
assure that the information is accurate and up-to-date, the user assumes all
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