Business

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Buy Or Sell A Business

Factors to Consider When Buying A Business

1. What is the type of business that you wish to buy and do you have any experience with this type of business. It may be difficult for you to buy an existing business which has been operating profitably for many years if you are unfamiliar with the industry in which it operates. Prior success is no indication of future performance. New management may affect the success or failure of a business.
   You may consider asking the seller to stay with the business for a few months and work with you while you become acquainted with the business.
2. Take a look at the cash flows of the business and plan for any shortfalls. Some businesses are seasonal and may have slow months where revenue doesn't even cover the expenses. Examine the accounting records and look for trends. If you notice that some months will have a short-fall in cash flow then you'll have to be prepared for this. In some cases obtaining a line-of-credit from an established bank or credit union may help you to finance slow periods. If the business is risky then banks may not lend to you and you'll have to provide your own funding.
3. Consider the asking price of the business and evaluate if the asking price is justified by your net present value calculation of expected cash flows. To obtain a net present value project out the earnings for a reasonable period such as 10 years then apply an appropriate discount rate adjusted for risk. You will need to ues a spreadsheet or financial calculator to use the formula to calculate the net present value.
4. Consider the reputation of the seller and place appropriate weight on the financial statements. Sellers are motivated to sell their business for the highest price possible. As such, it is in the seller's interest to inflate revenues, mark-up assets and under-report expenses. You may request audited financial statements prepared by an accountant so you can place more trust in the financial statements.
   In some cases the seller may be operating a home-based or internet-business and does not have any audited financial statements to present. In these cases be very cautious.
5. Ask the seller why he / she is selling the business. In many cases the seller realizes that there are changes to the environmnet in which their business operates which will adversely affect future performance. Many times a seller will sell a business as a last resort before shutting down the business if he cannot find a buyer.
   A good example is a local coffee shop on the corner near my office was for sale. Shortly after the coffee shop was sold I noticed a famous national brand franchise coffee shop open across the street. This forced the buyer of the local coffee shop to sell to close down as the local shop could not compete against the newly opened national franchise.
   Always be wary of businesses for sale. If the business is so profitable and expected to continue to be so then why would anyone want to sell it?

You may wish to search for businesses for sale in your local newspaper classifieds, craigslist or find newspapers classifieds.

Business News

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