This how-to guide will help you determine if and how to go about purchasing a business.
You have to be up front and honest with yourself when you are going to buy a business; you've got a lot of homework to do! The following questions and related discussions are ones you should ask yourself when you are determining if a business is the right purchase for you:
1. How much capital (cash flow) do you have?
When you are purchasing a business, as you do when buying a home, you have to know the purchase price. Many businesses (especially franchises) will require a set amount of money you have in reserve (savings, stocks, etc.). This is also considered part of your net worth. A simple rule of thumb regarding your net worth is how much money goes out every month versus what comes in every month? If you have only a house payment of $500.00 and you have a rental property down the street which pays you $800.00 a month and a small consulting business which you run out of your home office that turns a $400.00 a month profit, you are then earning $700.00 positive cash flow a month. Your net worth at the end of the month is positive $700.00 a month. Multiply that by twelve for your year's worth.
2. How much money do you have for a down payment?
As you do with a home, you need some money to put down for the business, while the remaining portion could be financed through the current owner, through a bank or otherwise. A good principle to follow as far as a down payment goes is thirty percent of the purchase price. Therefore, on a $100,000.00 business, your down payment would be at least $30,000.00.
3. How much start up capital (money) do you need to have for this business?
Determine how much money it's going to realistically cost you to start your business. Figure out all of the start-up costs, including, but not limited to, overhead costs (paying employees, keeping inventory, supplies to run your business, etc.); hiring professionals to help maintain your business (attorneys, tax advisors, other related consultants); determine if you are going to incorporate or not (see number 8 below). These are just a few ideas to get you thinking.
4. Are you going to run the business yourself or just own it?
There's a difference in whether you plan to own the business or actually run it. If you just own it, you are hiring people to run the business for you--affording you your most important assets, time, to perhaps gain more insight to operating your business or to invest into starting another business. Contrast that with actually running your business (which in your individual situation, you may want to do) which entails putting in at least forty hours per week to work in the business, but also additional hours to handle the other aspects of the business (bookkeeping, ordering supplies, etc.).
5. What kind of training is needed to run the business?
There are many business opportunities out there, so you need to figure out what's best for you. There are franchises, which are operations already set up and in place, you purchase the rights to one and open your own business following the already in place business plan. There is a start up business--it's the 'you've got a great idea for a new company' idea and you've got to implement all the rules, regulations, procedures, etc. Make sure you cover all your bases and meet with all the people you need to before starting any business.
6. How much (if any) support staff is needed to run the business?
Depending on the nature of the business you are starting, you may not need any support staff in your business. On the other hand, you may need several employees with varying degrees of experience. Have you given any thought how you'll gain these employees? Will you provide training for them?
7. What legal aspects do you need to consider?
Because I am not an attorney, I strongly recommend that it's best to have an attorney working with you every step of the way, especially in the start up phase. There are many legal aspects to consider when you own a business, make sure to do your homework and research well in advance of starting up your company.
8. Are you incorporating?
Have you given any thought to whether or not to form a corporation? There are many things to consider when forming your own corporation (no matter the kind). Talking with your attorney and tax advisor about this subject is extremely beneficial.
9. How long can you afford to operate and fund this business?
You must keep in the back of your mind at all times. If you don't have a concept of how long your business can operate (and be funded) solely by you until your product takes off, you're in for a rude awakening. Do you have a plan to obtain outside monetary contributions or are you going to create a stock which you intend to sell publicly.
10. Have you created a business plan?
A crucial element to starting your own business is to have your business plan. This is a written plan of how you are going to enact your business. A typical business plan includes an executive summary (since it's usually the first item read, make sure it's well written), mission and vision, company description (background information and concept of your business), products and services (explain what your business produces or services), industry analysis (discuss trends and growth in the industry where your company exists, explain where your company fits in), target market (who is your consumer going to be?), marketing and sales plan (further define your target market and promote your product or service), competitive analysis (know your competitors and their business trends), management team, operational plan (this deals with the internal operations and equipment necessary for you to produce your product or service), financial projections (will your company make money and how long will it take to do so?), and an exit strategy (if you are seeking investors, how long will they wait before expecting their money back?).
You are now well equipped to begin researching buying your own business. Remember, having a team of competent professionals whom you trust will be crucial to get you through buying your own business.
