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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:
- Downward trends in the seller's
particular industry or individual business
- Personal affairs of the seller that may
affect the ability to sell the business (e.g., divorce)
- Expiring patents, permits, or licenses
- Changing franchise terms that will increase
operating expenses for the business
- Existing and new competition
that is being planned
- Increasing difficulty or
expense in getting raw materials, products, or
services
- The potential non-renewal of a
major sales account
- Significant increases in rent
to be expected (if the business space is leased)
- Unapproved existing variances
in violation of zoning regulations
- Leases that are non-assignable
or non-renewable
- Legal claims, encumbrances, and
liens against the business
- Pending litigation against the
business
- State and/or federal law
violations that will require a major expense to
correct
- Poor management of capital
assets
- Obsolete machinery, overvalued
inventory
- Partner and/or shareholder who
may not concur with the seller's desire to sell
- Unpaid taxes if you are buying
the company's stock (income, sales, FICA)
- Product obsolescence
- Potential major increase in
product liability insurance
- Potential labor union or other
employee related problems
- Inability of a buyer to replace
a "superman" seller who has a unique capability for
running the business
- Non-compliance with
environmental and/or safety requirements
- Recent suspension of a liquor
license for regulation violations
- Need to hire a policeman to
handle rowdy customers at certain times
- Recent bad publicity, bad
reports at the Better Business Bureau, etc.
-
An impending or actual zoning
change that will make business expansion difficult
or impossible
-
Credit problems with banks
and/or suppliers
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