How to Buy a Business

Buying a business is arguably the best way to become your own boss. Starting a business from scratch or buying a franchise are other possibilities, but only buying …

Buying a business is arguably the best way to become your own boss. Starting a business from scratch or buying a franchise are other possibilities, but only buying an existing, successful business provides an immediate cash flow.

There are many good businesses for sale, but there are several critical steps you must follow to be certain you buy the right one.

Determine what you’re really good at, not just what you’ve been doing

The ability to work for one’s self, to make more money and to be rewarded for one’s hard work is what entices most people to own a business, but when you are the boss, your money and future are at stake and buying the wrong business can become a very costly mistake. While it is okay to get on-the-job training as an employee, any business you consider purchasing must already fit brilliantly with your skill set. The right business for you will leverage your strengths and not suffer from your weaknesses. You do not have to stick to a specific industry where you have experience. Rather, take a self-inventory and determine the single thing that you do best (whether sales, marketing, administration, people skills operations, etc.), and match that to whatever the business needs to drive the revenue and profit.

Finding a good business is easy when you know where to look

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There are tons of good businesses available to purchase. Unfortunately, the garbage available to purchase is five times that amount. The Internet is a tremendous resource to begin your search through any number of the business for sale websites, but you need to expand your search beyond that. Review trade publication classifieds and consider contacting business owners directly, as well as attorneys, accountants, bankers and the local Chamber of Commerce.

How to figure out the real value of a business

It has long been said that a business is overpriced the day it is listed for sale. Keep in mind that what a seller thinks his business is worth has nothing to do with the actual value, and so you must completely disregard the asking price. Valuations should be based upon a multiple of the Owner’s Benefits which is the total of the company’s:

Pre-Tax Income + Owner Salary + Perks + Depreciation + Interest LESS certain Capital Expense Deductions

There are many investments available: from putting your money in the bank and getting a couple percent interest, to placing it all on 17 black for a thirty-five -to-one return at a casino. Buying a business falls somewhere in the middle. Your goal should be to generate a twenty-five to thirty-three percent return on your cash investment.

Don’t negotiate a win-win; negotiate a win-neutral

Buying a business always brings with it a certain risk. The savvy business-buyer can drastically reduce the downside by putting together the right deal. Regardless, the buyer is taking a larger risk and so the seller has to share in it. While many people preach the idea of a win/win scenario for all business dealings, the buyer is taking on greater risk and so two things should happen: First, the seller must have “skin in the game’ whether by financing the deal or with a performance-based agreement. Second, the buyer must negotiate hard and the balance must tilt in their favor. So while “win/win” sounds great, it is better for the buyer to win, and the seller to be “reasonably happy”.

Due diligence—conducting a flawless review

The due diligence phase is when you will have the opportunity to really dig into the business. Never allow a seller or their intermediary to limit the amount of time you have to do your research or restrict the specific documentation they will allow you to review. Any seller who tries to limit your access to information is hiding something—plain and simple! Allow yourself enough time to investigate the financials, the assets, the contracts, the leases, the competition, the employees and the policies. Your goal is to uncover any and all of the problems before you buy a business. Your investigation must be flawless.

 

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