Purchasing a Business at the Right Time in California
Whether you already own a business and want to expand, or you want to break into the business world by purchasing an established company, there are many things to consider before you begin the process.
Purchasing an established company means you won’t have the struggle to build a business from the ground up and can work on a previously established foundation. In other words, you will reduce business risks.
For example, I was talking to a business owner the other day and he wanted to sell. He explained the business had been going 3 years and while it was yet to make a profit (and his reason for selling), he explained his business was worth a lot of money as it took 5 years for a new business to become established. When I went on to explain to him that 5 years is too long and very few buyers of a business are willing to buy a business not making money, we finished the conversation with different points of view. However, my position remains the same. I’m yet to find any business buyer who’s willing to pay too much money for a business that is not profitable as their preference is to start the business themselves and do things their way.
To be even-handed, keep in mind that when you buy an existing business, you could inherit some of its downsides, for example, a questionable reputation or deeply entrenched operations that will be more difficult to optimize.
Factors to consider when buying a business.
When planning to acquire a business, consider whether the timing and fit are right for your company and if it will help it grow beyond what it could on its own.
Timing Is Everything
There are many points to consider when deciding if the time is right to acquire a business. You will need to evaluate your readiness on a financial and personal level and conduct market research on the industry.
Do your research to find out if your fundamental reason for buying an existing business is because you see the opportunity for growth; or as the seller likes to say, “this business has so much potential.”
How well do you know the industry?
Each industry has its way of doing business including government regulations, training, and hiring of employees, ups and downs in the economic cycle, barriers to entry by competitors, the willingness of third parties to provide finance, and more. Make sure these are understood if you choose to buy a business in a new or different industry.
How will it impact your current business and/or personal life?
If this is the first time or twentieth time of owning a business, your process to buy a business should be the same.
Here are exceptionally important items to consider.
- Do you have the time to own and operate your business as the buck stops with you?
- What role do you plan to play?
- Does this fit with your current skill set or are there major new skills you need to learn and how much time will these take to learn?
- Technology can quickly change an industry. Do you see major changes coming in the short term that could disrupt your ability to be successful?
- Are you willing to make the necessary sacrifices for the business to be successful? If you are unsure, step back and only approach business ownership when you are sure.
- Have you researched the market to understand where it is in the economic cycle?
- Have you researched the competition?
- Have you researched third-party finance if you need it to make the acquisition?
- Have you checked to make sure any advisors or critical decision-makers such as board members, executive management team, or investors agree or can improve your decision-making?
- Do you have time to invest in the acquisition process?
- Are you financially ready to invest?
- Does the reputation of the business you plan to buy match your reputation or can you adapt it to fit yours?
- Does the reward match your Return On Investment criteria?
Just as all good things in life they come with risk. At the end of the day, a successful business owner has successfully managed their risk as this is the essence of the capitalist system.
If you would like more information about buying a business please visit my webpage Buy a business or buy a copy of my book Successfully Buy your Business.
Purchasing a Business With Real Estate in California
No real secrets to buying a business. Running your own company lets you lead an organization, make impactful decisions, and enjoy the flexibility that allows you to work in a way that best fits your needs. By purchasing an enduringly profitable, slowly growing firm, you can combine the opportunity for professional independence with the stability of buying an established and profitable small business.
You’ll have many questions to ask when you’re buying a business. Working with a qualified business broker in California will pay dividends. Your business valuation consultant will help you review the documents, the business climate, and the industry so that you make a wise decision that will build your business for the future.
There is simply no “one size fits all” approach whether selling or acquiring a business with real estate. Here are some other factors to consider.
- Some California business owners that also own the Real Estate, simply prefer to keep the Real Estate and offer a lease to the buyer of the business. If a decision has been made to sell the business, before a final decision is made about whether to also offer the commercial property for sale or not, the following are important items to consider.
- How critical is the Real Estate to the operation of the business? For example, if the business is a gas station or a car wash built on the Real Estate the business operates from, it may be hard to sell just the business and offer a lease to a buyer. This is because the business cannot easily and readily be moved
- Is the Real Estate just land or does it include buildings or structures on the Real Estate? If it includes buildings or structures, are they in good condition or do they need repairs and maintenance? If repairs and maintenance are required, is the seller willing to pay those costs so the buildings and structures are brought up to date and the latest building code?
- The buyer will probably want a lease for the Real Estate. If the buyer wanted a three- or five-year lease with options but only stayed for the initial lease and then left, would the Real Estate owner easily find a replacement tenant? If the buyer is getting an SBA loan, they will require a lease to match the length of the loan which is typically 10 years.
- Has the owner or seller of the business been allocating an amount for rent and is this amount a market rate or the amount the owner of the Real Estate is willing to accept as rent? If there is no rent allocation or the rent is below the market rate and the buyer has to pay a higher rent, it will lower the value of the business as expenses are higher.
- This also applies if the owner of the business has not been paying the property taxes, building insurance, or maintenance of the Real Estate and now expects the buyer of the business and Real Estate to cover these costs.
- Are there any environmental issues on, or near the real state? If so, this may lower the value of the Real Estate and the business.
- When was the last time that local zoning ordinances were checked so if the Real Estate is put on the market, it is ‘smooth sailing’ to close the sale?
- Related to local zoning ordinances are local Use requirements typically defined at the municipality level.
- Is the Real Estate part of a flood zone?
- Sample report of California Commercial Real Estate with basic property overview, environment, building, value, and more.
- Sample report of California Commercial Real Estate with climate check including flood, fire, storm, heat, and more.
- Sample report of California Commercial Real Estate property of the environment with regulatory summary and neighborhood.
- Sample report of California Commercial Real Estate flood certificate.
- Sample report of California Commercial Real Estate with property condition report, site summary, building summary, hazard risks, and more.
- Sample report of California Commercial Real Estate estimate of value.
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