Business options: Buying an existing operation

Taking over an established enterprise provides not only a brand identity but also a location and customer base.

Purchasing a business from the current owner offers many of the features needed for success, including an existing location and customer base. A turn-key operation is so named because the reality of the current owner locks the door one night and the next morning the new owner unlocks it and is ready to continue the business. This uninterrupted linkage from one owner to the next is valued for its continuity in the community. Moreover, the possibility for changes in shopping patterns is greatly reduced.

In a previous Michigan State University Extension news article on another option for starting a business, Purchasing a Franchise, the primary value obtained was the brand. Buying an existing operation not only transfers the brand but also includes necessary assets for ready operation. Additionally, financing by the seller is a possibility. A continued stake in the operation allows the seller a real interest in the continued success of his or her former operation.

Perhaps the most contentious issue is setting the selling/purchase price. Many methods of determining value can be explored to establish a fair value. How the tangible and intangible assets are valued is a good starting point. As stated above, the business is being sold, not just the real and personal assets. How to value the “going concern” is problematic and leaves room for negotiation. If the business is currently owner operated then perhaps the purchaser is buying a lifestyle paycheck. The return on investment is contingent and dependent on “sweat” equity.

Return on investment is the profit divided by the investment on a yearly basis. Factoring in reasonable owner/operator wages, the ROI now becomes profit minus owner wages divided by the investment. Some negotiation on the reasonableness of wages leaves room determining the selling price of the assets.  

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