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Buying Tips: How to Buy a Business

  • Buy a business in an industry you understand to increase your chance of success.
  • Whether an individual or another business, determine the amount you are willing and able to invest before spending a lot of time on the process. 
  • Try to match your down payment to 1-1.5x cash flow or sellers earnings.
  • When approaching a bank for financing most will ask for three years worth of personal tax returns, personal financial statements, and a resume of the buyer. In some cases a third-party valuation of the prospective business or acquisition is required.
  • You will want to complete an asset based sale as opposed to a stock sale.  There may be rare instances where you must buy stock, but try to avoid it.
  • Realize the goal of a small business is not to pay taxes.  So, when evaluating a businesses tax returns do not always be scared of "losses" on the return.  You must determine if the loss is real or a calculated move to reduce their tax burden.
  • Speaking of taxes... if you look at a lot of businesses you will inevitably find one that claims "off the books" cash or income.  For the most part we advise sellers and buyers that if it cannot proved or the owner doesn't want to prove it a buyer cannot pay for it.
  • When you find a business that interests you start your research right away.  In a small business transactions good businesses sell quickly.
  • If you are buying a long standing profitable business, resist your urge to change something.  At least right away, try to learn the business before making too many changes.
  • Take this to heart..."NO deal is done until the cash is in the bank"  Many deals that look like they are done sometimes fall apart at the closing table.
  • Things to watch out for when buying:
  1. Downward trends in the seller's particular industry or individual business 
  2. Personal affairs of the seller that may affect the ability to sell the business (e.g., divorce)
  3. Expiring patents, permits, or licenses
  4. Changing franchise terms that will increase operating expenses for the business
  5. Existing and new competition that is being planned
  6. Increasing difficulty or expense in getting raw materials, products, or services
  7. The potential non-renewal of a major sales account
  8. Significant increases in rent to be expected (if the business space is leased)
  9. Unapproved existing variances in violation of zoning regulations
  10. Leases that are non-assignable or non-renewable
  11. Legal claims, encumbrances, and liens against the business
  12. Pending litigation against the business
  13. State and/or federal law violations that will require a major expense to correct
  14. Poor management of capital assets
  15. Obsolete machinery, overvalued inventory
  16. Partner and/or shareholder who may not concur with the seller's desire to sell
  17. Unpaid taxes if you are buying the company's stock (income, sales, FICA)
  18. Product obsolescence
  19. Potential major increase in product liability insurance
  20. Potential labor union or other employee related problems
  21. Inability of a buyer to replace a "superman" seller who has a unique capability for running the business
  22. Non-compliance with environmental and/or safety requirements
  23. Recent suspension of a liquor license for regulation violations
  24. Need to hire a policeman to handle rowdy customers at certain times
  25. Recent bad publicity, bad reports at the Better Business Bureau, etc.
  26. An impending or actual zoning change that will make business expansion difficult or impossible

  27. Credit problems with banks and/or suppliers

 

 

 

 

 

Copyright 2006 Veracity Business Brokerage and Consulting, Inc.