Guide for Business Buyers


Structuring a deal can be a complex process. Guide to buying a business includes several articles and notes to help individuals buy a business or run their existing business.
 
 
Why buy an existing business?
Tax Consequences
Management buyout (MBO)
 

  Why buy an existing business?

Chances of success with a business are higher when buying an existing business or a franchise. Developing a new business has a higher risk and reward profile. When developing a new business one has to first develop a product or service. The product or service will then has an adoption curve wherein the target audience may or may not accept the offering. Marketing can eliminate some of the questions upfront, but for most part the success of the product is ascertained when the product or service hits the market.

An existing business or franchise has sufficient history to base decisions on. Even if an existing business has not been doing too well, usually there is sufficient data to ascertain what the problems are and turn it around.

Some advantages of buying an existing business are:

Clients
- Existing client base to build on. However, you will have to pay a premium (business goodwill) for the customers you acquire in the business.

Chances of Success
- Greater chance of success then starting from scratch. This includes a product that has been launched and is profitable or potentially profitable.
- Simpler to value using tried and tested business formulas.

Operations
- Several risks can be eliminated through a detailed due-diligence process which includes evaluating the financials and marketing attributes of the business.
- Key relationships with suppliers, distributors and personal is in place saving you time and money.
- Support and knowledge transfer from the previous owner.

Financing
- Existing cash flow and proven track record make it simpler to raise money for growth strategies or working capital.
- Existing business records can be reviewed to forecast near-tern and long-term profits.

The disadvantages of buying an existing is the premium built into the business. Usually a larger investment is required to acquire a business. Moreover, a business that suits your needs may not be located in your area and may require you and your family to relocate.

 
 Tax Consequences

Starting a business from scratch is simpler from a tax point of view. When buying an existing business the tax consequences of the business must be considered very carefully during the due – diligence process. Typically no tax needs to be paid when you buy the business but the ongoing tax consequences must be considered carefully:

• The business may have ongoing tax liabilities which must be factored in
• The business may be audited or under audit and may have ongoing tax issues
• The earnings may be overstated or the inventory may be overvalued
• The business may have pending lawsuits
• The business may have large accounts receivable part of which may not be collectable

Therefore, it is a good idea to run the deal by a tax professional or an accountant who specializes in business deals. Tax consequences to the business seller include:

• The money obtained by selling the business must be declared to IRS in the US or Revenue Canada if the deal was completed in Canada.
• Certain tangible and intangible assets purchased more than 15 years ago can be written of.
• The business seller may need to indemnify the buyer of any tax debts not in the financials.
• Some jurisdictions require a transfer tax when the business or commercial real estate changes hands,
Besides an accountant, the business buyer must have a lawyer in his team to help with the transfer of money when the deal goes through.

Understanding the tax code is critical to completing a business deal and operating a business. Tax Savvy for Small Business: Year-round Tax Strategies to Save You Money is a great book to understand small business tax code and various business structures.

 
 Management buyout (MBO)

Management buy-out is the purchase of the business by the management team of the business. It is a feasible exit for the business owner and an opportunity for the management team and key employees. Buyouts vary in sizes. Management buyouts are usually completed with financial support from other businesses, bankers or venture capitalists. In a small transaction, outside partnerships and syndication may not be required. If a banker or venture-capitalist does invest in a management buyout, they expect a significant investment in the business from the management team.

In many cases a specific area or division of a business may not be of strategic interest to the owner and the owner may decide to divest it, creating an opportunity for the employees or the management team to acquire it. There are several advantages to management buyouts including:

• It ensures continuity when the business transitions from the business buyer to the business seller.
• Knowledge stays within the company and the business is more likely to keep its existing clients and business partners.
• Chances or success are high because the management team has a stake in the business and understands the business.

 

Disclaimer: BuySellBusinesses.com provides business for sale classifieds. All business for sale and other business opportunities are not an offering or purchase recommendation by buysellbusinesses.com. We rely on the accuracy of the content submitted to us by business owners and intermediaries representing business owners. A business buyer must seek the advice of a Business Broker or Business Professional such as a lawyer, financial consultant and accountant before closing the deal. Please review our Disclaimer for more details.

 
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