The path to business ownership – an Accountant’s viewpoint

The path to business ownership – an Accountant’s viewpoint

Have you long been thinking of either starting a business or expanding your existing business, and are now ready to move on this?  Before jumping in with both feet there are several considerations that one should explore.  Things such as;

  • Should I buy an existing business, or should I start my own business from scratch?
  • Will I need to incorporate or run the business as a sole proprietor?
  • What is the business that I am buying worth, and what is the payback period?
  • What due diligence is required and how should the purchase agreement be structured?
  • What is my exit strategy, and perhaps ideally, when?

We will look at these topics in more detail over the next several months.  However, let’s start these series of articles by looking at the pros and cons of buying an existing business.

Buying an existing business is likely the easier and less onerous way to become a business owner, versus  building a business from the ground up.

– instant access to the market place –

Perhaps one of the biggest advantage of acquiring an existing business is the instant access to the market place.  Presumably the business you are acquiring has a good reputation and an established customer base.  This information should be available to you to review and question.  Furthermore, the past financial information should be provided to you as part of your due diligence.  Finally, the physical assets and customer base that you need to start operating, already exist.  These last two items allow you to start generating cash flow from day one.

Another important consideration is financing the business acquisition.  It may be easier to obtain financing for an existing business compared to a start-up business.  A large reason for this is the existence of past financial data when buying a business.  This historical financial data allows you to more accurately project future cash flows.  Most lenders are very interested in the cash flows that will be generated in order to service the debt.  With a start-up business that information is not easily available, and any cash flow projections are based on assumptions that can’t be validated with past financial results.

– don’t be fooled into thinking the business has goodwill –

The purchase price of an existing business usually includes the price of the assets and goodwill.  These assets might include equipment, vehicles, land and buildings, licenses, and trademark rights. Goodwill on the other hand, is an intangible asset that reflects the value of the customer list, location, its name and brand value, and/or earning potential.  However, don’t be fooled into thinking the business has goodwill.  Not all companies have goodwill and this consideration should be explored closely before paying for it.

At the end of the day, an existing business should be generating cash flows quicker than a start-up business.  However ultimately, one has to weigh the purchase price of an existing business against the costs of starting up a similar business.

Next month we will look at the benefits and risks of a start-up business.

jonathan-mcgraw-bdo

Article provided by:

Jonathon (Tug) McGraw, BCOMM, CPA, CA

BDO Canada LLP

Jonathan can be reached at: jmcgraw@bdo.ca

 

 

 

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