Start Your Own Business by Inc The Staff of Entrepreneur Media Read Free Book Online

business’s products in danger of becoming obsolete or of going out of style? Is this a “fad” business?
    • What is the business’s market share?
    • What competition does the business face? How can the business compete successfully? Have the business’s competitors changed recently? Have any of them gone out of business, for instance?
    • Does the business have all the equipment you think is necessary? Will you need to add or update any equipment?
    • What is the business’s current inventory worth? Will you be able to use any of this inventory, or is it inconsistent with your intended product line?
    • How many employees does the business have? What positions do they hold?
    • Does the business pay its employees high wages, or are the wages average or low?
    • Does the business experience high employee turnover? If so, why?
    • What benefits does the business offer its employees?
    • How long have the company’s top managers been with the company?
    • Will the change of ownership cause any changes in personnel?
    • Which employees are the most important to the company?
    • Do any of the business’s employees belong to any unions?
     
    To get an idea of the company’s anticipated returns and future financial needs, ask the business owner and/or accountant to show you projected financial statements. Balance sheets, income statements, cash flow statements, footnotes and tax returns for the past three years are all key indicators of a business’s health. These documents will help you do some financial analyses that will spotlight any underlying problems and also provide a closer look at a wide range of less tangible information.
    Among other issues, you should focus on the following:
    • Excessive or insufficient inventory. If the business is based on a product rather than a service, take careful stock of its inventory. First-time business buyers are often seduced by inventory, but it can be a trap. Excessive inventory may be obsolete or may soon become so; it also costs money to store and insure. Excess inventory can mean there are a lot of dissatisfied customers who are experiencing lags between their orders and final delivery or are returning items they aren’t happy with.
    LET’S MAKE A DEAL
     
    S ort on cash? Try these alternatives for financing your purchase of an existing business:
    • Use the seller’s assets . As soon as you buy the business, you’ll own the assets—so why not use them to get financing now? Make a list of all the assets you’re buying (along with any attached liabilities), and use it to approach banks, finance companies and factors (companies that buy your accounts receivable).
    • Bank on purchase orders . Factors, finance companies and banks will lend money on receivables. Finance companies and banks will lend money on inventory. Equipment can also be sold, then leased back from equipment leasing companies.
    • Ask the seller for financing . Motivated sellers will often provide more lenient terms and a less rigorous credit review than a bank. And unlike a conventional lender, they may take only the business’s assets as collateral. Seller financing is also flexible: The parties involved can structure the deal however they want, negotiating a payback schedule and other terms to meet their needs.
    • Use an employee stock ownership plan (ESOP) . ESOPs offer you a way to get capital immediately by selling stock in the business to employees. By offering to set up an ESOP plan, you may be able to lower the sales price.
    • Lease with an option to buy . Some sellers will let you lease a business with an option to buy. You make a down payment, become a minority stockholder and operate the business as if it were your own.
    • Assume liabilities or decline receivables . Reduce the sales price by either assuming the business’s liabilities or having the seller keep the receivables.
     
    • The lowest level of inventory the business can carry. Determine this, then have