Buying an existing business may initially seem like a wise and easy choice for people who want to get into the business world or extend their business holdings. After all, doing so allows you to skip over the complex and oftentimes difficult aspects of building a company from scratch and ideally, jump right into making profits. However, just because the business is established doesn’t mean it is worth your time, effort, and money. There are numerous factors every entrepreneur should consider before purchasing an existing business to help ensure that the transaction will, in fact, fulfill your goals. In today’s blog, we have detailed six of the most important things you should consider before moving forward with the purchase.
Discover the key considerations before buying an established business. While the allure of skipping the challenges of starting from scratch may be tempting, it’s crucial to evaluate whether the venture aligns with your objectives. At The Matus Law Group, our experienced New Jersey real estate lawyers are here to provide guidance and support throughout the process. Call (732) 785-4453 to schedule a consultation and make an informed choice that sets you on the path to success.
1. Is the Timing Right?
First and foremost, you have to think of timing. Is it a good time for you to spend the money on a new business? Is the economy open to it? It is easy to get excited about the potential of purchasing a new company, but if the timing does not match up with your finances and other important factors, the transaction could prove ruinous.
2. Are There Issues with the Company’s Books?
You should always conduct thorough due diligence of the company’s books. Unfortunately, you cannot simply take the current owner’s word for anything. The company’s books will give you an idea of how viable and financially sound the business is, and also alert you to potential issues that the owner did not mention. Issues and discrepancies in the books could indicate serious problems that you will want to avoid.
3. Company’s Reputation in the Community
You want to make sure that if you buy an established business, it has a good reputation within the community in which it operates. Community reputation can tell you a lot about a company’s history, and a poor reputation in the community could be more of a mountain to overcome than you will want to deal with when you gain control of the business.
4. Potential for Growth
Consider why you want to purchase the business. Are you happy keeping things exactly as they were? Is the company as profitable as you want it to be? Most people buy businesses in hopes of growing them into something more. If that is the case for you, you will want to take a close look at the company’s potential for growth. If the potential is limited, it may not be worth your time and money.
New Jersey Real Estate Lawyers – The Matus Law Group
Christine Matus
Christine Matus has been a trusted advocate in New Jersey real estate law since 1995. As founder of The Matus Law Group, she brings decades of experience guiding clients through real estate transactions, estate planning, and nonprofit legal matters. Known for her deep commitment to community service, Ms. Matus has served on numerous boards and associations while also contributing to legal publications and public lectures.
In addition to her legal practice, Ms. Matus is actively involved in pro bono work and community organizations, reflecting her dedication to giving back. Whether assisting families with real estate purchases, estate planning for loved ones, or nonprofit governance, she offers clients both knowledge and compassion, ensuring their legal needs are met with professionalism and care.
Kristine Carranceja-Gurski
Kristine Carranceja-Gurski brings a unique background in financial services and retirement planning to her real estate law practice. Admitted to the New Jersey Bar in 2007 and the New York Bar in 2008, she combines legal knowledge with a practical understanding of financial matters, helping clients through real estate transactions with confidence. She has also been a leader in pro bono legal service initiatives, demonstrating her dedication to justice and accessibility.
Ms. Carranceja-Gurski provides clients with insightful guidance tailored to their needs, whether buying, selling, or protecting property. Her professional work is complemented by a lifelong commitment to community service, from leading nonprofit programs to supporting local organizations, making her a lawyer who values both her clients and her community.
Brayndi Grassi
Born and raised in Toms River, New Jersey, Brayndi Grassi offers clients a local perspective backed by strong legal knowledge. A graduate of NYU and New York Law School, she was admitted to the New Jersey Bar in 2015 and focuses her practice on real estate law. With roots deeply tied to the community and a family history going back to the Revolutionary War, Ms. Grassi combines passion for her hometown with skilled representation for clients navigating property matters.
Before focusing on real estate law, Ms. Grassi built experience in intellectual property and legal writing, even publishing in the Mitchell Hamline Law Review. Today, she helps clients achieve their real estate goals while bringing the same dedication and attention to detail that has defined her career. Known as a “Jersey Girl” through and through, she blends professionalism with approachability to serve her clients effectively.
5. Why is the Seller Leaving?
Are they leaving due to their health? Retirement? Or are they leaving because business is slow and they are trying to cut their losses? Get a clear picture of why the current owner wants to sell, and ensure it is not a reason that will affect the company’s ability to succeed once you take control.
6. Is It Worth the Price?
Conduct a thorough cost/benefit analysis of the sale. Is there a high enough potential for the business to have future success for you to spend the money that is being asked? Simply put, what are the chances that this purchase will pay off for you down the road?
Considering these six factors will help you to make a smarter and more informed decision when you make the choice to purchase an established business. If you are considering purchasing an existing business, the Matus Law Group can help. Give us a call today!
7. Reputation and Market Presence
Examining an existing business’ reputation is a pivotal step when considering a purchase. A strong reputation acts as a springboard for new ownership, offering a head start in customer trust and market positioning. In contrast, reversing a negative reputation requires a considerable investment of resources and time—often with uncertain outcomes. Engaging with stakeholders such as owners, employees, and vendors can uncover insights into the business’s standing and inform the viability of your investment.
The market presence of a business, often reflected in its market value, reveals much about its stability and growth potential. Market value considerations encompass tangible assets, income, and financial health indicators, painting a comprehensive picture of where the business stands in the competitive landscape. A robust market presence can suggest a thriving enterprise, while a weak presence might indicate underlying challenges.
Lastly, understanding liabilities is crucial to assessing a business’s financial health. A high ratio of liabilities to assets can be a red flag, signaling potential financial distress. Conversely, a manageable level of liabilities compared to income and assets can indicate a business with a strong foundation, poised for growth and success in the hands of a new owner.
| Factor | Key Questions / Data to Gather | What to Watch Out For |
|---|---|---|
| Is the Timing Right? | Consider your financial readiness, current market trends, and overall economic stability. | Buying during economic uncertainty or when personal finances are strained. |
| Are There Issues with the Company’s Books? | Review financial statements, tax records, and audit reports for the past few years. | Inconsistent records, hidden debts, or missing documentation. |
| Company’s Reputation in the Community | Look into customer feedback, online reviews, and community relationships. | Negative public image or ongoing disputes with clients or vendors. |
| Potential for Growth | Evaluate market trends, customer base, and opportunities for expansion. | Limited market demand or poor business model scalability. |
| Why is the Seller Leaving? | Ask about the reason for selling and check for recent performance trends. | Selling due to financial losses, legal issues, or declining industry. |
| Is It Worth the Price? | Compare the asking price with business valuation and future profit potential. | Overpriced business with unclear path to profitability. |
| Reputation and Market Presence | Examine market share, customer trust, and visibility in the industry. | Weak market position or negative reputation that may take time to fix. |
Conducting Thorough Legal Due Diligence
Before you even begin to assess the finances or the timing, a comprehensive legal review is fundamental. Overlooking the legal standing of a business can lead to significant problems and unforeseen costs after the purchase is complete. This step involves a deep dive into the company’s legal health to ensure a clean transaction.
Key areas to investigate include:
- Contracts and Leases: Review all active agreements with suppliers, customers, and employees, as well as any property or equipment leases. You need to understand all the terms and obligations you will be inheriting.
- Permits and Licenses: Confirm that the business holds all necessary local, state, and federal permits to operate legally. Missing or expired paperwork can halt operations.
- Pending or Past Litigation: Investigate any current, threatened, or past lawsuits. This includes everything from employee disputes to customer complaints, which could reveal underlying issues and potential liabilities.
- Intellectual Property (IP): Ensure that the company legally owns its name, logos, trademarks, and any other proprietary assets, and is not infringing on the rights of others.
- Employee Issues: Examine employment contracts and handbooks. Look for any history of wrongful termination claims or wage disputes that could create future legal challenges.
What is the Rule of Thumb for Valuing a Business?
Two commonly used types of rules of thumb can typically be identified. The first one involves a percentage of annual sales, or preferably, the sales/revenues of the past 12 months. For instance, suppose the previous year’s total sales amounted to $100,000. According to the rule of thumb indicating a 40 percent multiple of annual sales, the corresponding price would be $40,000.
Many experts have stated that revenue multiples tend to be more reliable than earnings multiples. This is because earnings multiples often involve adjustments to the earnings, which can be subjective, as well as the multiple itself. On the other hand, sales or revenues, which are essentially fixed figures, provide a more straightforward basis. In the event that sales taxes have not been deducted, it might be necessary to subtract them, although the sales figure remains unchanged. The only subjective aspect of this method lies in determining the appropriate percentage. The advantage is that when provided by an expert, the percentage multiplier becomes less subjective.
The second rule of thumb involves a multiple of earnings. In the case of small businesses, the multiple is typically applied to what is known as Seller’s Discretionary Earnings (SDE). The earnings of the business are then multiplied by a multiplier, typically ranging from 0 to 4. Several sources also highlight the use of a multiple based on EBIT and/or EBITDA.
The following terms are used to express earnings:
- EBDIT (EBITDA): Earnings before depreciation (and other non-cash charges), interest, and taxes.
- EBDT: Earnings before depreciation (and other non-cash charges) and taxes.
- EBIT: Earnings before interest and taxes.
It is crucial to acknowledge that these general guidelines are simplified approaches and might not capture the complete complexity and distinct aspects of a business. To obtain a more precise valuation, it is recommended to consult a New Jersey real estate attorney who can utilize more comprehensive methods customized to the particular business and industry. Arrange a consultation with The Matus Law Group to discuss your specific needs. Contact us at (732) 785-4453 to schedule a consultation.
