If you’re looking to become an entrepreneur, the first decision you have is whether to buy a business or start a new one. There are many advantages to buying a business, including a built-in customer base, operations process, and knowledgeable employees.
However, being a first-time business buyer can be stressful. It’s important to know what to expect and the pitfalls to watch out for along the way.
Here are some things to keep in mind as you buy your first company!
You Won’t Fit Every Business Opportunity
Some people feel that a person with strong business skills should be able to run any company, but that isn’t the case. You don’t want to make a decision based on track record or financials alone. Instead, make sure the business opportunity really fits you.
Do you know the business model? Are you passionate about and familiar with the industry? If not, this company isn’t a good fit for you. For your ideas and innovations to be successful, you must understand the industry and love the work.
It’s Not Good to Go It Alone
You might consider yourself a savvy individual, and you’re probably very smart and have an eye for details. However, you never want to buy a business without help.
There are a lot of pitfalls to watch out for when buying a business. For instance, something that seems too good to be true — in terms of business success or financing — probably is. A business broker can help you ferret out what’s going on behind the scenes.
Don’t let yourself be taken advantage of during a business deal. You’ll find yourself in a terrible financial situation with tons of regret. Instead, work with the right people from the beginning.
There are Several Ways to Value a Business
When you buy a home or car, there’s an accepted way to find a value, and it’s the same for all similar assets. With a business, that’s not the case. However, there are better valuation options to use, depending on the type of business.
For existing businesses that have been around for a while, you might use the earnings approach. Using earnings to determine a value can be done using capitalized earnings or discounted cash flows. However, this method relies on predicting future earnings, which can be difficult.
If you’re buying a business with a lot of capital or assets or hasn’t yet turned a profit, consider the assets approach to valuation. What you do here is take the tangible and intangible asset value and subtract debts and liabilities. With this approach, you look at both the current cash value of assets and the potential return on investment of using them.
The market approach is a final valuation method and may be used together with one of the first two. If similar businesses in the area have sold recently, how much did they sell for? How does that compare with the price you’re being offered now?
Working with a business broker can help you keep these valuation methods straight and use the right one for your industry and situation.
There Are a Variety of Ways to Fund a Business
Just like there are a lot of ways to determine a company’s value, there are a lot of ways to find financing as well.
One of the most common payment arrangements involves using a down payment and then agreeing to pay the seller on a set schedule until the balance is paid off. Make sure the down payment isn’t so large that you struggle to have the capital to run the business afterward.
You can look into traditional or Small Business Administration (SBA) loans as well. Many business buyers find that SBA loans are easier to qualify for and have more favorable terms for entrepreneurs.
Some buyers look into alternatives that can help reduce the purchase price, including issuing stock to employees, assuming business debt, and more. The key is to fully understand the terms of the deal and ensure you aren’t putting yourself in a bad situation.
Murphy Business Can Help You Find Your Dream Company
If you’re ready to purchase a business, you want to find a qualified business broker to help you. Murphy Business is just that. We have many years of experience helping business buyers and sellers, and we know what it takes to close a beneficial deal.
If you’re ready to start the journey of buying a business, contact us today!
