Buying a company

Buying an already functional company can be a better alternative than starting a company from the very beginning.

This enables an entrepreneur to focus on developing the business, instead of using money and time to develop products and services and develop customer relationships. It is common that the process of changing ownership takes from three to five years including different phases. This means that the seller has made the decision to sell a long time before the sales process begins. Usually the company for sale has been organized to offer an attractive business solution to the buyer. The idea is to sell a functioning business but not necessarily to purchase i.e. commercial property.

A buyer’s question and task list

1. Is there a future for the business?

• Explore the business idea, competition situation, future prospects and plans
• Pay attention to how much the success of the company is based on the current owner, the less the better

2. Is the whole business opportunity right for the needs of the buyer or is there something that is not worth buying?
Often there are actions or assets which are not a part of the actual business and are economically profitless

3. Is the selling price reasonable?

• Buying a business is an investment for the buyer. How much profit is expected from the investment? The profit should exceed the profit of the common investments, unless the reason for buying is to secure a job.
• Usually there is a so called goodwill–value, which is more than the market value. The goodwill – value must be paid back in five years.
• The business must pay the invested capital back to the investor (salary higher than employees, annuities, taxfree, capital income). A reasonable payment time is from 5 to 10 years depending on the business.
• The top limit is not more than sales per year or three times the gross margin when buying a business (no properties)

4. Evaluation of inventory and machines.

• The true value of the inventory and machinery is an essential part of the selling price.
• There can be dated or unsellable products which have been estimated at full price
• The situation of maintenance and /or updating machines or programmes
• Productive equipment can include expensive moulds, machines, tools or programmes and so on, which don’t have current value
• There can be such raw materials and materials which are unusable, for example, in package markings and recycling

5. Product liability and risks

• Guarantee risks, which can be massive
• Possible unfinished trials and reclamations
• Upcoming changes in legislation
• Personnel risks, will the key persons stay in the company
• Over 6 month old sales invoices which have not been paid, and the payment is unlikely

It is important to check all property and financial accounts before purchase with the help of experts.

Business contracts should be drawn up with the help of professionals.

Franchising: An alternative to buying a business concept

Franchising can be a better alternative compared to a starting an own business. Franchising is typically divided into two main forms, the product delivery and brand franchising, and also the business model franchising. Because it is about doing business with the help of another party who has developed the business idea, the compensation is charged by the franchising giver. Compensations are usually an admission fee (e.g. 20 000 €), co-operation fee (e.g. 7 % of sales) and a marketing fee (e.g. 5% of sales).

Take a look www.franchising.fi or www.ketju.fi and find out more about companies offering franchising and compensations collected.