How do I plan for the purchase of an existing business?

If you're buying a business, your process of building a business plan and forecast will be much the same as it is for any existing business. This article covers a few special considerations for building a plan based on purchasing a company.

Starting with an existing business plan

In an article titled Planning for Purchasing a Business, our company's founder Tim Berry writes:

"Start with the information you get from previous owners. Ideally, during the purchasing process, you received a business plan from the previous owners. One of the important functions of a plan is to define business prospects, therefore, sophisticated business sellers normally use a business plan as a selling document. It should contain information about business history, financial history, previous management, and possible prospects."

That business plan can be the basis of your future forecasting. If you want to represent this past performance in your new business plan, read Representing past performance in LivePlan

Initial Balances

If you're an individual or have a current business entity purchasing a business, we recommend using the Initial Balances entry point in your forecast. It's the cleanest way to represent the assets and liabilities you've taken on with the company. The Initial Balances will take into account all of the following:

  • Assets that come with the business
  • Inventory you're taking on with the purchase
  • Cash you're assuming from the business bank account
  • Outstanding Accounts receivable and Accounts payable
  • Any sales and income taxes the company owes
  • Paid-in capital you have invested in order to buy the company
Note: If you have a business that is purchasing another business, we recommend consulting your financial advisor for recommendations on the best way to represent this in a business plan.

Step 1: Representing the purchase amount

The best place to represent your purchase of the company is through the Starting Balances entry described above. The Paid-In Capital section of this entry represents the amount you paid for the company:

paid in capital.png

That amount will then be calculated as an equity investment in your business plan's financial statements.

Step 2: Representing the business assets

Chances are, the business comes with certain equipment, furniture, or vehicles that will continue to provide value for some time. You'll want to enter these items into the Starting Balances entry as well. LivePlan will ask for the total value of these assets, the amount of depreciation that's been claimed on them so far, and the remaining useful life.

Note: The Starting Balances entry will treat all existing assets as one total line item. If you prefer to itemize your existing assets, you can enter them as individual Asset entries in your forecast. But in that case, you would also need to create a separate Investment entry of the same total value to balance the outflow of cash in the financials.

If you personally own any assets that you plan to use in the new business, read Entering previously-owned assets for a start-up business.

Step 3: Representing bad debt

If the company has debts that won't be collected, you can enter these as Expense entries in the forecast.

Because every business purchase scenario is a little different, please feel free to contact us if you have any specific questions about your forecast.

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