THE PURCHASE ALTERNATIVES.

In this blog we will look at the purchase alternatives and the process of becoming an owner, or part owner, of a business that is already up and running. Just like starting a new business, this method of getting into business will require a business plan and it also include the following questions:

                                         

IS BUYING A BUSINESS RIGHT FOR ME?

Buying an existing business is usually expensive than starting a brand new company because you can shrink your ideas down to fit your budget in the market however, the existing business require the same expenses as an mature company spend in the market. Let’s talk about the merits and the risks of buying existing business.

                                                 

MERITS

• ·         Efficient methods and procedure: existing company systems have refined over time for some measure of efficiency that you would not have when starting a new business. The owner of the existing business should have made already most of the mistakes so it leave no room for error anymore.
• ·         Defined market: through several mistakes the existing company should have already found their potential customers and how to deal with them in an appropriate way.
• ·         Established customers: Existing customers have earned a great image and branding in the market; also they have build their customers with the goodwill in the market. Although a new business has to go through a hard time to build a great image and branding.
• ·         Established suppliers: this is important not just because of proven reliability, but also because of any credit terms that are in place with them.
• ·         Trained employees: having employees in place not only keeps the business going and generating cash, but these employees can also serve as a resource to help train you as the new owner.

RISKS

• ·         Overvalued assets and redundant assets: the assets are overvalued sometimes and as a follower you have to buy because the existing company rules.  Also redundant assets are owned by a business that are not necessary for it to produce profit at current or projected levels.
• ·         Lease problem: escalator clauses and inability to renew are major problems. You may be looking at a business whose success depends on the site, but the lease for the property runs out in three years. Alternatively, you can first make a offer on the business that is conditional on your being able to negotiate an acceptable lease with the landlord.
• ·         Negative Image: some business has a bad reputation among their potential customers. However it can be changed with changing the name of the company or have the same name but put up under new management.
• ·         Impending location changes: Some businesses are depending on the geographic area of the business like retails and consumer service business. If the location is not good to gain traffic for the business it is better to change the location and if planned changes will dramatically alter the traffic patterns around the business site, you might rethink your buying decision.

WHAT’S INVOLVED IN BUYING THE BUSINESS?

Many of the risks in buying a business can be minimized by properly assessing the business. The assessment should logically cover most of the factors in the business plan, looking whether the business is satisfactory in each area as well as identifying things you can do to improve if you owned the business. You should always consider before buying the business because sometimes business owner is in trouble and look for new capital to keep business alive but it only works for few years more and it end up in failing with the new capital with it. If you buying a part ownership in a business it should be because the business is growing and need capital for well-planned expansion; also you have some expertise that would be an advantage to the business and the current owner are willing to give up some equity in order to get you in his business.

               

WHAT SHOULD THE PURCHASE AGREEMENT INCLUDE?

           

• ·         Shares vs. Assets: the store, factory, or office will look the same and the company may have the same name and the same employees, but it will be a different legal entity consisting of you and any partners you may have. When you are buying a company either you can buy the assets of the company or the shares of the company.
• ·         Payment Options: in many cases, the seller wants to have the full payment on the finalization of sale. But the seller will be in trouble if a buyer found out the actual reason for selling the company. In that situation buyer will have leverage to negotiate with the seller on the payment or he can ask for the advantages or benefits from the owner to buy .
• ·         Non-competition issues: purchase agreement will often include the restrictions that prevent the old owner of a business from entering into any form of competition with the business. These usually preferred with the geographic range or a time limit. The need for such a restriction is obvious if the business involved the personal services of the owner.
• ·         Disclosure Issues: it basically says that the seller agrees to tell you about anything that might adversely affect your decision to buy the business. This covers all of the items listed in the risks of buying a business.
• ·         Continuing assistance: it is a fairly practice to have the old owner on the board to help as a employee or adviser, often for an extended period after business is sold. It can be arranged under the conditions of the purchase agreement.

                                           

HOW MUCH SHOULD I PAY? 

                                 

A business is constantly changing and adapting to the market place, the environment in which it lives. It grows, it shrinks, it gets sick or healthy. We use different methods to analyses the actual value of the business which includes valuation concepts which involves ratio analysis, rate of return and present value. However we can also use valuation methods like asset methods and income methods. In spite of many objective methods of valuing a business, ultimately the value of a firm is whatever price can be negotiated between a buyer and seller. In determining a price to pay for a business, however, it is only prudent to use a variety of different techniques for estimating the value of the firm.

In this process of purchasing you should consider all the possible alternatives you can think of. Buying alternatives will lead to the leverages and merits of existing business to buy at a negotiate price from the seller.