Getting a small business loan to buy an existing business is a move done by many successful entrepreneurs. When you buy a business, you already have an established customer base. It is less risky than starting one from scratch.
There are, however, a lot of things you need to do to make sure you’re getting a good deal.
Choosing the Right Type of Business
When choosing the right type of business to buy, consider the following:
- Your interests, experience, and skills.
- The size of the business you’re ready to handle, in terms of sales and number of employees.
- The location where you want to operate your business.
Once you’ve chosen the geographical area and the industry you want, get a list of all the businesses in that area that meet the conditions.
Evaluating the Value of the Business
To get an idea of the value of a company, evaluate it in terms of:
- The business’ inventory includes the finished products, work-in-process products, and raw materials that are counted as part of the company’s assets ready or will be ready to be sold.
- This includes all equipment, real estate, furniture and fixtures, and vehicles listed on the company’s balance sheet under items of ownership.
- Contracts and legal documents. Evaluate all contracts such as lease and purchase agreements, sales contracts, distribution agreements, subcontractor agreements, union contracts, and employment agreements. Also include articles of incorporation, patents, copyrights, and registered trademarks.
- Tax returns. Find out what the actual financial net worth of the business is. Some business owners purchase products for personal use then charge them to the business to take advantage of tax deductions.
- Financial statement. Assess the company’s financial statements for the past five years including their books and financial records then measure them against their tax returns. This will help you determine the earning power of the business.
- Sales records. This is for determining the sales pattern so you can compare it against industry benchmarks.
- Determine possible legal ramifications and other costs arising from loans.
- Accounts payable. This is necessary for evaluating the cash flow of the company.
- Look at the loans, outstanding notes, and other debts the company has agreed to.
- Merchandise returns. Merchandise returns affect some key performance metrics like revenue and profit. By knowing the return levels, you can judge if the amounts are unacceptable or if you can try to minimize them.
- It can be an asset or a liability.
Financing with Small Business Loans
Whatever payment option you have agreed with the seller, the transfer of ownership can’t take place if you don’t have adequate money.
You could borrow from banks, but they’re likely to ask you to put up some form of collateral like real estate or your company’s inventory. This isn’t a viable option if you don’t own the company yet.
Many entrepreneurs go to Proper when they’re looking for small business loans. They offer a perfect small business loan for entrepreneurs who want to buy an existing business. Their small business loans are based on your credit score and are issued to you as an individual.