Buying Tutorial
Do You Dream of Owning Your Own Business?
Buying a business can be a complex process, from finding the right one to working out all the details required for a smooth transfer of ownership.
While there is no “perfect” business, we know the importance of finding one that fits your needs, talents, skills, and lifestyle. There are many different types of businesses for you to consider. Ultimately, it’s about finding the best overall fit for you and your family.
Below, you will find some helpful information as you consider whether buying a business is right for you.
Going into business for yourself is a big step, one that can be full of apprehension and even fear
For Business Buyers
Almost 90 percent of all those who purchase a small business have never owned a business. Most of them bought a business that was different than what they had been looking for. These buyers had the opportunity to explore the marketplace and subsequently found a business more to their liking. Sometimes, the seller financed at least part of the sale.
- Pride in the service or the product
- Flexibility
- Income
- Control of own destiny
- Recognition
- Security
- Privacy
- Status
- Customer and employee contact
What To Look For
Get the Basic Facts
Begin by gathering preliminary information on the price, terms, revenue, cash flow, and general location. It is crucial to ensure that the cash required to buy the business is within your investment capacity.
At this stage, don’t focus too much on the full price; the key factor is the cash needed to purchase the business. There are various ways to finance a business, including cash, SBA or conventional loans, retirement rollovers, portfolio loans, HELOC, or even complete or partial seller financing. Determine if the seller offers financing options and align your strategy accordingly.
Additionally, the business must be able to meet your basic financial needs. While you might expect the company to improve under your ownership, you must also be able to cover your living expenses and the business’s debt service (loan payments).
How Long Have They Been in Business?
A business with a long track record typically means it has a history of success. It will be well known in the area, and people will be used to patronizing the business or using its services. The longer it has been in operation, generally, the better the business.
How Long Has the Present Owner Owned the Business?
The longer the present owner has been in business, the more likely he or she has been successful. People don’t tend to stay in business if they are not making money.
Why is the Present Owner Selling?
Suspicions could arise if the owner has only been in business for six months and is 37 years old. However, the more valid the reason for the sale, the more realistic everyone will be. Remember that after five or six years, people often get restless, experience burnout, and seek new challenges. Understanding why the seller is selling is crucial. Make sure to get a satisfactory answer.
Why Are Books and Records So Important?
Financial records provide a good indication of how well the business has performed over the years. However, tax records are not designed to present the company in the best light; no one likes to pay more taxes than necessary, and business owners are no different. Generally, tax returns represent a worst-case scenario.
You must examine the expenses and identify non-cash items, such as depreciation, business use of home and vehicles, and other seller discretionary expenses. How important was that business trip to Nashville? A professional business broker can help you review these records and weigh the pros and cons.
Remember, financial records are only the history of the business. Past performance is not guaranteed to be duplicated or repeated, and all your profits will be in the future. Ultimately, the business’s financial records indicate what the company has done; what you do with its future is up to you.
How Can You Determine if the Seller Has Reported All of Their Income?
The simple answer is – you can’t! Not reporting income is against the law.
You should consider only the income that the seller can show you. We all know, of course, especially in cash type businesses, that there is the possibility that the seller is not reporting all of his or her income for tax purposes. This “underground economy” has been well-documented and is in the billions of dollars. Many sellers will tell you about how much they are “skimming,” but you should ignore their statements, since they have no way of proving these amounts.
The bottom line
Being in Business for Yourself Can Be a Daunting Prospect
What to Look for When Buying a Business
What is the Asking Price, and How Much Can I Earn?
These are not the right questions to ask initially. First, you need to know how much cash the deal requires as a down payment. Remember, a business’s earnings are usually much more than the income statement shows (see Seller’s Discretionary Earnings).
A wise approach is to get more information on the business and even visit before ruling it out or getting too involved in the numbers. It’s all part of the learning process. One of the most common questions new buyers ask is about the acquisition process itself.
There is no right or wrong way to buy a business. However, you must get answers to all your questions and have all the information necessary to make an informed decision.
Insider Tip
Unless you are intimately familiar with the type of business you are buying, including a transition agreement as part of the purchase is advisable. This agreement ensures that the seller or a key employee will stay with you for a sufficient period (typically 30 days, with an additional 30 to 60 days of telephone consultation) to teach and transition you into the business. If you require the seller’s assistance beyond this period, consider offering a consulting fee for their continued support.
Here are some questions that you should ask yourself before taking the next step
For Business Buyers
How Long Have You Been Thinking About Buying a Business?
Many people interested in buying their own business are unwilling to commit. For most, looking at a business for sale is like looking at an expensive car or boat they never intend to buy. The reality is the longer you look, the less likely you are to buy, which is usually due to a broken process and the inability to handle fear and anxiety effectively.
What Is Your Timeline for Buying a Business?
What Is Your Primary Reason for Buying a Business?
Are You Willing To Invest Most of Your Liquid Assets in a Business?
Buying your own business requires a serious financial investment. If you’re the type who does not want risk, you might want to rethink owning your own business. It is not for the faint-hearted.
Do You Have the Strength to Make Your Own Decisions and Be in Control?
Does Your Family Support Your Decision To Own a Business?
Are You Open to Exploring Various Opportunities, or Are You Focused on a Specific Type of Business?
Do You Have Reasonable Expectations?
Are You Ready to Take the Leap of Faith Required To Buy a Business?
Do You Need a Guarantee?
Do you have other questions?
Visit our Buyer FAQ Section for More Information
- Why should I buy a business rather than start one?
- What is the real reason people go into business for themselves?
- How are businesses priced?
- What should I Look for?
- What does it take to be successful?
- What happens when I find a business I want to buy?
- Why should I go to a business broker?
- Do I need an attorney?
