Don’t have any confusion about it, buying a business for sale is a multi-step process with each step being essential. You should never think about proceeding to the next position until the preceding step is complete and whatever you do, don’t be tempted to short-cut ever. Adequate preparation and time spent revealing everything there is to know about the business will be well spent here and will help to ensure that no horror stories are uncovered once you take the helm.
Before you even start to talk to a prospective seller, a great deal of information can be revealed. But hold on for just a second, are you really sure that you possess the level of enthusiasm you need for this type of business? Do you really want to be involved in that industry and does it represent an area that you truly want to be engrossed in? Unless you intend to be a completely “hands-off” owner and are therefore taking considerable additional steps to ensure your safety, it is far better for you to be involved in an industry that you have a good feeling for, if not a considerable level of enthusiasm.
A process of due diligence requires you to inspect all kinds of documentation:
* Financials: including profit and loss statements, balance sheets, reconciliation documents, payroll records, tax reports. Be wary if the seller says that there are a lot of “cash sales,” as unless these have been declared to the tax authorities, you cannot count them and they should be ignored.
* Employee records: including information on individual behavior, attendance, length of service and pay scales.
* Licenses: these will include county, city, state and federal licenses, as well as any certification you need to operate the business. It would be in your best interests to look at records independently, certainly if you believe there may have been any problems in the past or possible discrepancies.
* Equipment records: including age, depreciation, maintenance, replacement cost, and any required inspections.
* Inventory records: including turnover, condition, and re-saleability.
* Supplier contracts: are they transferable, do you have alternatives and is there goodwill?
* Property records: including rental agreements and portability – the latter element is of considerable importance.
When you have inspected all agreements, contracts, licenses and records, you may find they are in good order and will work for you and then need to turn to the question of setting a good value as you buy business assets. A number of different ways to look at this exist. Here are some of the methods commonly used to calculate:
* Asset-based multipliers, are where a total value of the assets is used to determine a value.
* Rule of thumb, where industry benchmarks are used to establish the value (not recommended).
* Revenue-based multipliers, are where a percentage or a multiple of the monthly or annual revenue is used. Again not recommended.
* Cash flow multiplier – where the business owner’s profit is added to the salary and realized perks, with a number of expenses deducted. This is most often the most appropriate way of valuing the business for sale.
While there are many documents and figures that can be proven to backup an owner’s claim, or not as the case may be, you need to take into account significant facts. You need to look at the reputation and age of the business, what level of competition you may expect, the existing legal structure, quality and physical location of the premises and last but by no means least, the difficulty in obtaining a new lease. When it comes to a business for sale, all will help you to determine whether you should buy a business like this, or not.
Richard Parker is the President and founder of the prestigious Diomo Corporation – The Business Buyer Resource Center. His celebrated materials, seminars and consulting have encouraged thousands of aspiring business buyers from around the World to pursue their dream to buy a business.
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This post was written by admin on May 22, 2010
