Established Firm or Start-Up - Key Decisions

Established Firm or Start-Up - Key Decisions

Starting your own business offers plenty of possibilities.  If buying into a franchise isn’t for you, think about purchasing an existing independent company - or take the hardline entrepreneurial track and launch an entirely new venture.

Either choice requires a significant amount of preplanning. Action steps include market research, networking with successful business owners and lining up sufficient financial and legal support.

Established Firms - Is History an Asset?

While trained personnel, a ready-to-go venue and established operations may be benefits, buying an existing business has a downside.  For instance, both personnel and existing customers may object to changes you make in policies, inventory, management and the corporate “look.” Should you decide to replace current staff with your own people, you may face legal entanglements, as well.

To sidestep potential problems, take a few proactive measures:

  • When considering a business, ask the current owner why the firm is for sale. The reasons may encourage - or dissuade - you.
  • Make sure you know that industry. If you haven’t worked in the field, research, consult with experts and consider taking on an experienced partner or employee.
  • Once you spot a business you like, draft a letter of intent. At minimum, include a suggested purchase price, proposed time frame to close the deal and payment terms. Don’t forget to draw up a confidentiality agreement, as well. This protects both you and the current owner regarding the release of sensitive data during the sales transaction.
  • Before you close the deal, learn the firm’s inner workings. Visit during business hours; observe routines; and get to know staff and customers. Doing this provides real insight into what is working - and what isn’t.
  • Thoroughly review personnel records. Information on staff accomplishments, sick day rates, turnover history and complaints will tell you a lot about the overall company.  
  • Dig into pertinent financial records. Cash flow statements, aging reports, debt history and related documents are good indicators of the company’s current fiscal health.  A thorough review of profit and loss trends will help you develop and adjust your own financial projections.
  • On the legal side, examine existing contracts and investigate active and settled lawsuits. Look at customer complaint records, too.

When calculating a purchase offer, several proven models can guide you through the process. A capitalized earning approach is predicated on the return an investor would expect on his investment. The cash flow method centers on how large a loan the business’ cash flow will support. A balance sheet method calculates purchase price on a firm’s tangible assets.

Before you start crunching numbers, though, think about consulting a financial professional to guide you through the process. This can save time and money, and also prevent costly errors.

If you prefer the do-it-yourself route, SCORE provides a downloadable fair market value tool

Final Steps

The services of a good attorney are invaluable when conducting major business deals. Besides helping you manage leases and required closing documentation, a lawyer can assist with security agreements, federal/state tax forms, vehicle transfer papers, and patents and trademarks.

Finally non-compete covenants and employment agreements hold a real potential for litigation. As such, an attorney is not a luxury, but a necessity.

Starting From Scratch

Trailblazers might savor the excitement of launching a start-up, but hours of planning must happen before you schedule a ribbon-cutting. To get your priorities in order, develop a “Why start a business?” list first.

Questions should include

  • What is special, different, exciting about my idea?
  • Do I have - or can I get - enough money to start a company?
  • Does my product/service have long-term potential?
  • Who are my competitors and where do they operate?
  • Is the local market large enough for my goods or services?
  • Will I be able to obtain sufficient business insurance?
  • Will I need special permits or licenses to operate my business?
  • Is the local worker pool wide and deep enough to supply employees for my company?

After conducting additional research to flesh out your question list, begin to develop a business plan. Stick to clear, simple concepts - a blueprint of sorts - to keep you organized and on track.

At minimum, your initial plan should list short and long-term business goals; a financial plan; preliminary marketing strategies; and valuable industry-focused research, including market demographics, financial outlook and potential problem areas.

Incorporate marketing strategies you would like to initiate, such as a timetable and advertising budget. Many experts also suggest featuring a general management plan, which you can use as a basis for an operations manual.

Once your business plan is set to go, you are ready to take active steps toward launching your company.