In times of economic crisis like the present one, there are incredible opportunities of acquiring a business.

If you have thought of, or are thinking of, buying or selling a business, this article could be of great help.

When buying a house we find abundant literature about how to handle documentation required etc and above all we find qualified professional lawyers and accountants to take care of the matter. Of course we also find simple translators who call themselves “solicitors”, or the typical estate agency who offer their services.

When we wish to buy or sell a business things are different. There is not so much literature available and in this area “the professionals” have no experience. Twenty one years of experience cannot be condensed into one single article, but it is possible to give the following pointers.

The first thing the investor has to consider is whether to start a business from scratch, or to buy one that is already established. There is much satisfaction in starting a new business, to be creative and innovative, making your own decisions, etc. However, there are also big risks attached to creating any new company. Many are unsuccessful, the cost of creating the business is high and it is necessary to promote the business ……

When you buy an established business, the infrastructure is in place, the client base is already established and the name is already known. The financial accounts of the business allows the investor to see and know what he is buying and allows him to plan whatever finance necessary in the most simple manner. On the other hand, an established company may well conceal problems (financial difficulties, bad reputation, etc.) The reputation of the business is linked to the reputation of the former owner and may result in difficulty in establishing a new identity.

At the time of buying a business we recommend that you have a professional person to evaluate the following:

− Material advantages: equipment and inventories

− Cost of personnel

− Administrative licenses

− Rental agreement of the business

− Client base and client loyalty

− Financial condition: analysis of balance sheet and profits and loss accounts

− Administrative debts

− Responsibility of any existing guarantees

− Type of relationship and credit with suppliers, distributors, etc

How is a business valued?

There is no simple answer to this question. The following are some points that are used by professionals. Like all products on the market depends a great deal on supply and demand.

− Replacement cost: What would the cost be if starting the same business from scratch? The value of certain areas of the business are easy to calculate: inventory, plant and machinery, etc; but to put a value on other things is far more difficult to estimate: client base, how well known is the name, does the company have a good image, etc.

− Payback: In simple words, when will I recuperate my investment? Let us imagine that I invest 100.000€ in a type of business with profits of about 20.000€ per annum. In 5 years I will have recuperated my investment

− Method of capitalization of profits: This method used by official administrators and assessors in businesses or companies, is to capitalize half the profits of the last three fiscal years at 20%.

How do I pay / receive payment? Some common types of transactions are:

− Direct sale: The disadvantage of this option is that the salesman is only interested in selling the business and if the buyer has a problem he would find it difficult or impossible to recuperate is loss.

− Stage payments: The buyer acquires the business in stages (from three to five years)

− Renting with option to purchase: The business is rented for a specified period of time and the investor has the option to purchase the business at a specified price at the end of the rental period.

− Contract of administration: The buyer administers the business for a certain sum and has the option to buy it if the business meets his expectations. As with all business transactions, the terms and conditions of agreement should be studied carefully.

As I said earlier, it is not possible to condense, in one article, all the requirements needing to be fulfilled when buying or selling a business (Certificates that are currently required for applicable taxes, indirect costs, and present requirements of the Law of Urban Renting, etc.) In future articles we will discuss the most frequent problems associated with purchasing a business and what, in general, causes a buyer to abandon a purchase.

J Silvente