Tuesday, March 3, 2015

Determining if the Business You're Buying is Worth it!

Buying an existing business is never a particularly easy proposition. In fact, it could be argued that you really shouldn’t do so unless you’re already pretty familiar with how businesses are operated. That way, you avoid the mess that usually accompanies buying into something you generally don’t know all that much about. It prevents you from being taken advantage of. That said, businesses are bought and sold every day. The ones that sell come in all shapes and sizes, they may have been enormously profitable, or a complete bust. The point is that you shouldn’t automatically assume that you’ll fail just because the world says you can. Sometimes, it’s a really great opportunity when you have the option to buy a business. Even if it is, though, You’ll be doing yourself a favor to tick off a list of basics before you plunk down some cash on what might end up being an unproven business. 

You’re going to be tempted to look at the profitability of the business first, but this could be a mistake, particularly if the business you’ve got your eye on is a small or family run business. The first thing you should look at is the clientele. Who’s spending their money at the business? If it’s nothing but the previous owner’s friends, family, and colleagues, you could be asking for trouble, since the owner might just sell you the business, then take his clients elsewhere.

That being said, don’t altogether leave out profitability. That, along with customer traffic, should be one of the things you look at carefully. For this, make sure that the prior owner provides you with copies of the business’ financial records. If they don’t have records, or the owner doesn’t want to share them with you, then be concerned about how “up and up” the business is. If they’re selling, you should be able to look over the profits and losses of the business, not take it on faith that the business is doing well. Compare the balance sheets against the outgoing cash for at least a few years to help determine how much you’re willing to pay for the business. If its profitable, it isn’t likely to come cheap, but at the same time, if it isn’t profitable, you shouldn’t have to pay much for it at all.

The equipment of the business is another important consideration to weigh in your decision. Let’s say the business is an automotive service business. What equipment will be included with the sale? If its just the clients and the garage space, then it’s probably not a very good deal. Alternatively, if the sale includes tire balancing and mounting equipment, diagnostic equipment, lifts and specialty tools, then you’re looking at tens of thousands of dollars worth of equipment that you won’t have to invest in after the purchase. Take a look at the condition of this equipment, its age and service record, and adjust your purchase offer accordingly. Most every business has at least some equipment necessary for continuing operations, so make sure your new business is outfitted properly.

Buying a business is never an easy task, so if it seems to be easy, scrutinize the deal all the more carefully. Make sure you have the services of a lawyer who can advise you over the course of the sale, and have an independent accountant look over the books before you make an offer. It might cost you a couple thousand dollars, and it might be that that couple thousand dollars spent talks you out of buying into the business at all. Think about it this way, though - If you go in blind, and lose all your money on a bad business deal, won’t you be mad you didn’t spend a few grand to save yourself a bunch more money?

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