By Bennett Whitlock, CRPC®, Private Wealth Advisor
According to the Small Business Administration (“Small Business in the US by the Numbers,” Townsquared, May 14, 2017), there are 28 million small businesses in the U.S. that employ over 120 million people. Purchasing a business comes with numerous financial considerations, so here are five steps to take:
- Determine the type of business in which you are interested. Common business options you could purchase include:
- Franchise opportunities, which offer the potential to capitalize on a brand name, track record and
organizational support to help get the business up and running. This also comes at a cost, including potential ongoing fees paid to the parent company.
- Independent businesses, which must be valued based on their bottom line, assets and reputation in the marketplace. You will be able to make decisions independently; however, you’ll need to establish your own support system.
- Consulting or start-up companies, which often get launched because the current owner has a skill, product or expertise that meets a niche need. They tend to be less formal in structure, but the business could be developed into a more profitable one if it continues to grow.
2. Take the time to complete your due diligence. If a seller puts a business on the market, be sure you understand why. Carefully assess the value and market opportunities of the business. You should ask to review the last few years of financial statements and use them to project potential revenues and
costs. Consider bringing in an accountant for an unbiased perspective. Additionally, be sure to understand what is or is not included in the asking price, such as intellectual property, real estate, staff or equipment.
3. Enlist the help of an experienced attorney. Drawing up the terms of a purchase agreement can be a complex process. Work with an attorney to vet the agreement terms and prepare legal documents related to the sale.
4. Develop a plan to finance the purchase. There are a variety of ways to execute a business sale, including taking out direct or installment loans, obtaining venture capital, or paying the previous owner a percentage of future sales. Most options require cash up front as a down payment. Work with your
financial advisor to identify accounts or investments you could draw down to make the purchase. Avoid dipping into your retirement savings. Your retirement could last decades, and there are no loans you can use if your savings come up short. Additionally, any retirement withdrawals you make are taxable
and will incur a 10 percent penalty. If you are still searching for the right opportunity, consider saving a set amount each month or investing the sum according to your expected timeframe for the purchase and risk tolerance.
5. Review your personal financial position in detail before making a commitment. Leaving a career with a steady monthly paycheck will require some adjustments to how you handle your expenses and savings. Discuss this with your significant other and how to continue funding important financial goals like saving for retirement or your child’s college education. Many of these choices may have tax implications, so consult your tax professional. Additionally, explore your options for health and disability insurance to make sure that you and your family maintain adequate coverage.
Many factors can affect your decision to buy a business, and a thoughtful plan is a great place to start. Talk with your financial, legal and tax professionals to make sure you are in a strong financial position to buy a business when the opportunity presents itself.
Bennett Whitlock, CRPC ®, is a private wealth advisor and managing director with Whitlock Wealth Management, a franchise of Ameriprise Financial Services, Inc. Learn more at WhitlockWealth.com or call 703-492-7732.