Purchasing A Small Business Essay Example For Students

Purchasing A Small Business Essay Purchasing a Small BusinessOutlineI. Deciding to buyA. Why buy a small business?B. Starting out-the nine stepsC. Initial details to consider1. Are partners needed?2. Economic factors3. Is the location acceptable?4. Tax strategyII. Where to startA. How much income is needed?B. The Thirteen Steps to acquiring a businessIII. Locating a potential purchaseA. The Acquisition PlanB. Beginning the search-who can help?III. Negotiating a purchase priceA. Valuation of a small business1.Why do a valuation?2. Choosing the method that is best for your situation3. Some different methods of valuing a businessa. Ability-To-Pay Methodb. Discounted Cash Flow Methodc. Excess Earnings MethodB. Calculating goodwillC. Setting the purchase priceD. The letter of intentIV. Finding the initial capitalA. Sources of financing1. Traditional sources2. Nontraditional sourcesB. Guaranteed loan programsV. Closing the deal1. Get a lawyer2. Audit review3. The closingVI. The rewards of working for yourselfThe decision t o purchase a business of your own is not an easy task. There are many things to consider before the final decision is made. First of all, exactly what do you want to accomplish? To make millions of dollars, right? Or is it to have the freedom of being your own boss? Whatever the reason, you must be sure that it is something that you are ready to devote an exorbitant amount of time and energy into and that it is something that you really want. Otherwise, you might be stuck doing something that you hate. If you are ready to commit then you must ask yourself just how far will that commitment extend. How much of your own time, energy, and money are you willing to sacrifice?After the decision is made, the acquisition of a small business can be summed-up into nine steps, in which most will be elaborated upon later. These are the nine steps to any business acquisition, regardless of its size or industry:1. The search, locating a business available for sale. 2. Identifying alternative candidates. 3. Valuing the business. 4. Negotiating a price and terms. 5. Investigating the company. 6. Preparing the business plan. 7. Sourcing the financing. 8. Preparing the closing documents. 9. Managing the transition period. (Tuller, 10)Some considerations that cannot be avoided when purchasing a small business include: the question of needing a partner, the current economic factors, considering alternate locations, and developing a tax strategy. When debating whether or not a partner is needed or wanted, you need to know if youre going to need additional equity as well as sharing the risk of failure. For these reasons, a partnership seems to be a great idea, but there are also many cons that should be recognized. Having too many partners can alter the ease of decision-making, shared liability can cause obvious problems, and sharing profits means less for you.Added to this, getting out of a partnership can be very difficult. Evaluating the current economic factors simply means to know what you are getting into. Be sure to have some knowledge about the business itself and its market. Know how to make and sell the product efficiently and in a service industry, be sure to know the current and correct way things are done-sometimes they are not one in the same. Location is key. Location of the target can be a major determinate in both the financing of the deal and probable success in managing the business after closing.Theres no sense spending time, effort, and money on a target located in the wrong place. (Tuller, 12) Along with this, the personal strife of having to travel a great distance to get to work can be very frustrating. So, be sure that the location of your potential business is profitable in every way. One the greatest minds of the 20th century, Albert Einstein, once said, tax is the most difficult thing in the world to understand. Unfortunately, with the ever-changing laws, that problem gets worse every year. This means that you should have knowledge of the current tax laws. You will have a unique opportunity to make decisions on exactly how much money will change hands, and how I will allocated on the payment schedule.(Smorgenburg, 112) Maximizing profit for both you and the seller can only be done through proper knowledge of tax law, if you are not comfortable handling this alone, a consultant might not bad a bad idea. After all of the above is settled, the next thing to figure is the amount of initial income is required. Not only the income required to purchase the entity (which will be elaborated upon later), but also the amount of money that you need to survive for the years to come. If you need $100,000, then dont look at smaller companies which can only yield $30,000. (Tuller, 23) The following 13 steps will help to locate a target and close the deal in the shortest possible time-and when buying a company, time is money. 1. Define realistic parameters. 2. Prepare a reasonable Acquisition Plan. 3. Review current tax laws for structuring the deal. 4. Develop a detailed plan for sourcing potential targets. 5. Perform a preliminary due diligence investigation. 6. Negotiate a price and terms based on a realistic valuation. 7. Perform a thorough due diligence investigation. 8. Prepare a complete business plan. 9. Develop sources for at least three alternative financing structures. 10. Arrange for the final updated due diligence investigation. 11. Write the Buy/Sell Agreement and negotiate the final contract language. To Build a Fire - Significance of the Words Dying EssayEquity financing means obtaining funds in exchange for selling or giving up a part of interest in the business. Equity financing is not a loan; rather, it is the sale of a part of you business.(Fallek, 82) The popularity of equity financing has increased in the high tech industries in the past few years. However, selling a part of your newly purchased business may not be your cup of tea, so choose your type of financing wisely. Some traditional sources of capital include yourself, family and friends, commercial banks, loan companies, insurance companies, credit unions and private investors. The old saying, dont mix business with pleasure is applicable when dealing with family and friends. Taking a loan from these sources can cause turmoil if the loan cannot be paid back. Banks are the standard for business lending. The amount they charge is based on two factors: the size and history of the customer and the risk the bank will take in providing the loan.(Fallek, 85) If you are able to decrease the banks risk and have a standing credit line, you will get the most out of your loan. The other types of traditional lenders are less frequently used, but are also good sources of capital. Nontraditional money sources are unlimited in number and type, but you need to be creative to acquire the necessary funds from them.(Fallek, 89) These sources include customers, suppliers, leasing companies, local development compan ies, and advertising for money. Customers or potential customers are often great sources of funding, as well as suppliers. Suppliers will furnish you with the necessary equipment and product. Leasing companies and local development companies are also good nontraditional sources of capital. You can actively seek funding by running a display advertisement in the business section under the appropriate heading in the classified ads of your local newspaper. Specify the amount of money needed and the type of business for which it will be used.(Fallek, 91) Yet another source for funding might be through the Small Business Administration. They offer different types of loan programs to small businesses. The SBA Guaranteed Loan Program grants a loan on the basis that the individual needs more time than allotted by other lenders to pay back the loan, has insufficient credit, or lack business experience. There are no restrictions as to the number of SBA loans a company or individual may have, a s long as the SBAs exposure does not exceed $750,000.(Fallek, 96) The final step in acquisition of a business is the closing. You will need a lawyer if you dont currently have one. The search for the right lawyer requires certain questions to be answered. For instance, you want to find out the lawyers hourly rates, experience, availability, if there is any conflict of interest between the lawyer and the seller, and any other applicable questions. The best way to find a lawyer is word of mouth, ask friends and family for references. When a lawyer is located, you must then begin the audit review. Even thought most buyers work with their local CPA in preparing the business plan and counsel with him on tax matters relative to the acquisition, the audit review should be preformed by an independent CPA firm in the same city as the target company; preferably on of the Big-5 firms. The audit review consists of a comprehensive look at business since the last audit with particular emphasis on determining the adequacy of internal controls and internal reports.(Tuller, 192) Be sure to take this step, it examines all aspects of the business and insures that it is a safe investment. After this is complete, its time to close the deal. The documents generally needed for proper closure are: a buy/sell agreement, an earn out agreement, a promissory note terms and conditions agreement, title search and title insurance, lease agreements, employment contracts, personal guarantees, and an equity agreement with the lender. These documents are dealt with and an announcement should be made to the employees, customers, and vendors of the change in ownership. There is a mood of anticipation, of excitement, and even-if the truth be know-of fear. Of all the events which take place in the business world, nothing can match an acquisition closing for pure excitement and thrill.(Tuller, 203) the actual signing of the transfer documents will not usually take more than an hour. The key is not to worry about what you are signing, thats what your lawyer is for. After all the money spent, the time devoted and the effort put forth, the business is finally yours. Running your own business can be very rewarding. You dont have anyone to answer to besides the government. You are in complete control. Along with this the ability to write off certain expenses is enough of a reward in itself. The effort you put forth is completely up to you. The life and death of the business is in your hands. Bibliography1. Fallek, Max (1994). Finding Money for Your Small Business Enterprise-Dearborn: USA2. Fluery, Robert (1995). The Small Business Survival GuideSourcebooks, Inc.: Naperville, IL3. Horn, Thomas (1990). Business Valuation ManualCharter Oak Press: Lancaster PA4. Peterson, C.D. (1990). How To Leave Your Job and But A Business of Your OwnSVS, Inc. (Video)5. Smorenburg, Michael (1998) Business Buyers KitCareer Press: Franklin Lakes, NJ 6. Tuller, Lawrence (1990) Buying In: A Complete Guide to Acquiring a Business orProfessional PracticeLiberty Hall Press: Blue Ridge Sumit, PAWords/ Pages : 2,853 / 24