Buying an Established Business

An alternative to beginning a business from the ground up is to pur­chase an established operation. In many cases, the cost of entry into the profession can be reduced if an established business can be purchased at a sacrifice price.

A horticulture operation will usually be put up for sale for one of three reasons:

1. The owner has reached the age of retirement and has no one to carry on the business.

2. The owner has become ill and is unable to carry on the business.

3. The business has been unsuccessful.

The first two situations can provide excellent opportunities to acquire a successful business at a reasonable price. The third situation does not provide such an opportunity. An unsuccessful operation may have a bad location, obsolete or improper equipment, or a history of poor products or service that leaves it with a bad reputation. It is dif­ficult to overcome such obstacles.

When a successful business is purchased, a certain following of established customers (termed good will) comes with the purchase. It is an important asset but not one that can have a value (and price) assigned to it easily. Sellers usually try to inflate its value; buyers should resist paying much for something that is so difficult to appraise.

When considering the purchase of an established business, the future owner should look at its past performance as an indication of how it will do in the future and also assess the potential of the business under new ownership. The seller should be asked to supply profit-and – loss statements for the preceding five years. These should be taken to an accountant and studied carefully. The earnings, the increase or decline of sales, the salaries of employees, and the budget for advertising during the five years can all provide a picture of the past performance of the company. In attempting to determine how the business will do under new ownership, there must be a strong indication of steady growth over the next five – to ten-year period. The business must promise not only a good salary for the owners, but a return on the invested capital. If the projection by the accountant does not favor both salaries and profits, it would be best to keep looking for a more suitable business.

If and when a good business is found for purchase, the selling price must be evaluated in terms of the factors that it represents:

• Equipment will seldom be brand new. Its value at the time of purchase will be greater if it is newer. If it is old and has been fully depreciated, it may be a liability.

• Existing inventory is not always usable. It may not be what the buyer would have stocked and may contain outdated products that have been rejected repeatedly by customers. The inventory values on the books of the seller should not be accepted without investigation. Items may be carried at full value when in reality they are unsalable and nearly worthless.

• Accounts receivable are monies owed to the seller that will be owed to the buyer after the sale is finalized. If a large percentage of those receivables are long-standing bad debts, they should be discounted in all or in part.

• Good will, as already mentioned, has a vague value and should not represent a large percentage of the sale price.

• Use of the existing name may be part of the sale price or may have no value assigned to it. It may be advantageous to use the established name for a while, especially if the firm has a good reputation, but the advantage should be carefully assessed. It is difficult to assign a value to reputation.