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Pros and Cons of Buying an Existing Business Part 2

September 17, 2012

 

In my previous post I looked at some of the elements (customer accounts and ‘goodwill’) that make up an existing business: If your interested in more information about a business, start digging deeper-

Key questions you must ask before buying an established janitorial business:

Why is the company for sale?

 

Where are the accounts located?

What is the monthly gross billing?

What are the monthly expenses, and what is the monthly net income?

What kind of salary is the owner paying himself? Can you live on that salary?

Does the business have growth potential?

Are there outstanding liabilities which you will be assuming? If so, how much are they? Are the monthly payments factored into the current cash flow figures?

What has been the trend over the last few years? Has there been growth, stagnation, or decline?

Note: examine the owner’s financial records for the previous three years and for the current year to date. Ask to see tax records to verify the owner’s claims of revenue and profit!!!!!!!

What equipment and supplies are needed to service these accounts?

How big are the accounts, and how many hours nightly does it take to clean them? Monitor the operation. Spend a few days of observing the work being done.

Are the existing employees willing to stay on under your ownership?

How long has the seller had these accounts?

Is there a good mix of business customers? Is the company relying on one or two large customers for the bulk of its revenue? Are there contracts in place to ensure that those relationships continue under new ownership?

 

How quickly do the customers pay their bills?

Will the seller be willing to work alongside you for a few weeks or months after you get established?

Note: speak with current customers. Are they happy with the service they are now receiving? Ask if there’s anything you can do to improve the service they’re receiving. Remember, customers are under no obligation to stay with you when you take over!

 

If you decide to spend several thousand dollars in purchasing an established contract cleaning service, get legal advice, preferably from an attorney with experience in small business sales and acquisitions.

Pros and cons of buying an existing business:

Advantages:

  • Immediate cash flow

  • Potential owner financing

  • Possible existing employee base

  • Existing management and operational structure

  • Working business concept

Disadvantages:

  • Taking on debt with the risk that involves

  • Immediate overhead

  • Possible steep learning curve

  • Unknowns: lack of information, hidden liabilities, etc.

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