Buying an established business can be an attractive alternative to starting out from scratch: The business may have an established client base, the location may be successful, or provide an opportunity for growth.
If you are looking to buy a business, be sure to carefully evaluate all aspects of the business before you jump in feet first.
Know The Market And Reason For Selling
Make sure to look for hard and soft factors that may indicate the true motivation for selling. Carefully consider the market trends for the business, competition, and local economy.
- Is the industry in a state of decline?
- Are there more advanced competitors entering the market?
- Is the location demographics changing or crime rates increasing?
- When is the lease due and will the rent increase?
Sometimes external factors have influences the decision to “retire” or move on from the business.
Profit & Cash Flow
If you are serious about buying the business, look at the company’s financial statements. Has it consistently shown a profit? Are profits increasing or decreasing? Is revenue growing or shrinking?
Financial statements contain a fair amount of information but may include some estimates. Be sure to have your accountant review the company’s financial statements.
The Value of The Business
There are a number of factors to consider when valuing a business. You may look at the value of the net assets (assets less liabilities), the fair market value of the company’s assets, including intangible assets and goodwill. Sometimes a factor of after-tax income may be used to estimate a reasonable price.
Whatever method used, make sure you consider a trend of at least three years of comparative data.
What’s Not Included?
Make sure you fully understand what is not included in the business. One, often overlooked, issue is working capital. The seller may want to keep the working capital whereas the buyer wants to keep it.
Are there any personal fixtures that will be kept by the owner?
What about inventory? Is the inventory owned by the business or held on consignment.
Knowing these answers will affect the ultimate price you pay.
Structure The Deal Appropriately
As the old saying goes: “There is more than one way to skin a cat.” The same is true of buying a business.
When you buy a business you may buy the company’s assets only or agree to buy the shares of the company. When you buy the shares, you are acquiring its assets and its debts which may impact your long term profitability. You may want to consider buying the company’s assets instead and leave out any debts or other obligations.
Get Advice
Buying business can be complex. To ensure you get the best value for your investment you should retain the services of a professional accountant.
To discuss this article and how I may assist you, please give me a call at (289) 288-1206.
