More and more people are considering owning their own businesses by starting one or buying an existing business, according to Betty Lorton, recently retired business development specialist with University of Missouri Extension.
"New business start-ups are high but considering the fact that about 80 percent of new businesses fail within five years, it might seem less risky to buy an existing one," says Lorton. "But really, that depends on a number of issues."
Lorton offers the following considerations:
- Buying a business can be a great investment. Pluses normally consist of an existing customer base, a successful location and an income from day one. The downside is that it could mean a loss of one's life savings and a day in bankruptcy court.
- Normally, problems arise because a prospective buyer doesn't know the right questions to ask of a seller...or misleading answers are given.
- Take accounts receivable as an example. This is a business asset consisting of amounts owed to a business for products sold or services rendered. If accounts receivable are equal to $50,000, then purchasing them for $45,000 can look like a good deal.
- But only later does a buyer discover many of the debts are more than six months old. And some of those debts may be disputed by the person who supposedly owes the money.
- Realistically, no more than $10,000 may end up ever being collected.
- A financial review to determine the age of the debts and to verify accounts receivable would have uncovered the problems so that a buyer could better judge the real value.
- Relying on a seller's financial statements furnished by his or her accountant should also be done with caution.
- Although they may look impressive, more than 95 percent of the time these statements are compiled, which means all the accountant has done is to take the information provided by a business owner and put it into standard formats. No effort whatsoever has been made to verify any of the information.
- Most businesses also do a physical inventory only once a year so inventory figures on the reports reflect what should be on hand (not necessarily what is). A look at the seller's tax return is normally the best place to obtain reliable data.
- Agreeing on non-compete clauses, determining who will pay accounts payable and settling on fair values for other business assets are just three of many areas of concern to consider when buying a business.
Your local Small Business Development Center can help with matters related to buying or selling a business, such as calculating if a buyer can breakeven or make a profit based on a business selling price. Appointments may be made for consultations on small business issues by contacting the Small Business
Development Center near you.
Authored by: David L. Burton, University of Missouri Extension
Date Reviewed: 1/2/08
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