Buying an existing business can be a great way to expand your network, build a team, and secure a reliable source of revenue. However, it can also be a considerable challenge—especially if you haven’t dealt with the subject before.
Factors to Consider When Buying an Existing Business
Fortunately, with a little research and preparation beforehand, you can succeed in your bid to acquire an existing business. Here are the key factors to consider when buying an existing business.
1. Tax Returns
As a real estate investor, you will need to pay income taxes on your earnings—regardless of where you live. The best way to prepare for this is to work with a tax preparer.
A tax attorney is an excellent resource, but a tax preparer can help you save time and money. You can use the IRS’s website to find local tax offices or hire a tax professional to help you with your tax return.
Make sure you fully understand how your income is taxed and file your return on time. If you’re financing the purchase, get your ducks in a row first. If you’re buying an existing business, understand the business’s depreciation and income tax implications, and file your return accordingly.
2. Balance Sheets
A balance sheet is a financial statement used to understand a business’s assets, liabilities, and owners’ equity. The essential items on a balance sheet are cash and marketable securities. If a business doesn’t have any cash or marketable securities, it can’t trade and will probably go out of business.
Stock is another common form of cash that should be recorded on a balance sheet. A cash-disposition account is another asset that’s essential to a business’s balance sheet. CDA’s are tax-free ways to either pay off old debts or acquire new assets. Ensuring that there is nothing odd on the balance sheet is one of the most important factors to consider when buying an existing business.
3. Sales Records and Accounts Receivable
When you buy an existing business, you’ll likely have less inventory than the business had when you bought it. This can make your path to profitability a little more challenging, giving you more room for error. You may not have the inventory capacity to meet current orders, or customers may forget to pay you for the goods they ordered.
You can file a claim with the Internal Revenue Service to collect back taxes due on the overage. While you won’t likely be able to acquire another business in its place, you can use the accounts receivable balance to your advantage. If you keep your accounts receivable as short-term as possible, you can rest easy knowing you won’t fall into the same cash-flow issues that led to the old accounts receivable balance.
4. Accounts Payable
While accounts payable shows how much money you owe a company, a cash-flow STATEMENT shows how much money you’re making. On a cash-flow statement, you’ll likely see a line for current assets and current liabilities.
The difference between the two is cash. Most companies report cash flow in aggregate. If you don’t have any cash flowing in, you could lose your ability to make payments and file income tax returns. If you’re purchasing an existing business, get a local number for the business.
This will help you get in touch with local auditors that will help you determine how much cash is coming in and going out of the business. This will help you gauge the cash-flow stability of the organization.
5. Debt Disclosures
When purchasing an existing business, you’re taking on some debt. This may sound positive but remember: You only have so much capital to work with, and debt can quickly become a distraction. If the business is experiencing cash-flow issues, you may have to pay creditors sooner rather than later.
The best way to secure debt is to create a business plan that details all of your financing options. If you have to choose between a cash-flow business and a debt-free business, go with the debt-free option. It may sting a little, but remember: Debt is a choice.
6. Advertising Costs
As an investor, you’re always looking for ways to generate sales. What you don’t understand may seem like a great way to sell your services or products. Be very careful with hidden fees and hidden agendas in business deals.
While you may want to include a deal with every new purchase, always read the fine print. Make sure you understand the cost of the item and how it will be applied to your account. If you have questions or concerns, bring them up with the seller.
Being a good investor means you have to be willing to take risks, but you also need to be smart about your risks. This is true for both debt and equity investments. It is essential to understand the risks involved with each investment to decide how much risk is acceptable for your portfolio.
By looking at these important factors to consider when buying an existing business, you’ll have a higher likelihood that you avoid damaging situations or skeletons lurking in the closet.