Buying businesses

Buying businesses


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Although starting a company from scratch sounds thrilling, it's perilous because it's the most challenging approach to enter the market. Many business owners find that purchasing an existing company is a superior alternative. The learning curve is sped up, the cost of "on-the-job training" is decreased, and numerous mistakes that you might make while starting your company from scratch are avoided when you purchase a running organization. Everything is set up in an already operating business, from clients to a bank credit line.

Remember that there is a reason why every company that is for sale is for sale. It's up to you to determine whether it's a personal or economical motivation.

When trying to buy a firm, try not to get too tense. Take your time and remember that most firms don't sell all at once. And be sure to refrain from the following actions:

Buying on price. Buyers don't take into account ROI. If you're going to invest $50,000 in a business that returns only a three-percent net, you're better off putting your money in a CD or municipal bond.

Running out of cash. Some buyers don't set aside enough money for operating capital and instead use the majority of their cash for the down payment for the business. This is the worst type of foolishness since it jeopardizes the future of the company. Cash should be carefully managed because it is king. As a general rule, working capital should equal at least three months' worth of operational expenses, and at least 10% of your cash should be designated as contingency funds.

Buying all the receivables. In general, buying receivables makes sense, with the exception of when they are 90 days or older. The more time the account has been open, the harder it will be to collect. Having the seller guarantee the receivables can protect you since any money that is not collected can be deducted from the cost of buying the company. Receivables that are past due by 90 days are the seller's to collect.

Failure to verify all data. Most business buyers accept all the information the seller gives them without doing due diligence (preferably by a CPA who can audit financial statements). Heavy payment schedules. During the first year or so, it makes sense to have smaller payments, graduating to larger payments as the business grows and becomes successful. This can easily be negotiated with a seller.

Buying a business is a complex and highly emotional transaction. Be mindful of your emotions at all times since they show why you are passionate about a particular firm, which will help you make the greatest choice and obtain the finest terms. And don't forget to discuss your ideas with your lawyer, CPA, and other professionals.

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