Ways to evaluate a Business

 

1) Learn how the business was valued. If you discover these amounts:

A) Market value of real property (if any).

B) Market value of furniture, fixtures and equipment.

C) Salable inventory at cost.

D) One year's net profit, including owner's salary .

Then add A, B, C, and D together you should be in very close range of the asking price. This is not a set formula and is intended to give you a general idea of how to value a business. There are other factors that could come into play.

2) After your down payment and closing costs, the business must do two things, provide you with a living and pay for itself.

  

3) Find out why the business is for sale. Is it a logical reason? Businesses are for sale for many reasons. For example:

a) So owner can buy bigger, better, newer, shinier business. (Step up to a new challenge).

b) Retirement.

c) Marital problems.

d) Partnership dispute.

e) Tired.

f) Bored.

g) Losing money.

h) Relocation.

i) Health.

4) Keep in mind that the average term of ownership in the U.S. is 4.9 years.

5)  While investigating a business, remember that all business listings must be kept confidential or

A) Employees may quit.

B) Competition will take advantage of seller.

C) Creditors will shut off line of credit.

All of these reasons could hurt you as a buyer of that business. So, it is in your best interest to respect the confidentiality of a listing.

6) It is safer to buy an on-going, “turn-key" business because.

A) Eighty percent of the new businesses started from scratch, fail in the first 3 years.

B) Ninety percent of the businesses three years or older continue to make money.

7) Will the owner finance? Some real advantages of owner financing are.

A) Normally a lower rate of interest.

B) Shows they have confidence in the business providing you with a living and him receiving his money.

Keep in mind however that some business owners may not be in the position to offer financing. They may have a solid reason why they can not accept financing. You should discover that reason before you dismiss the business.

8) Most business listings will include enough seller training to guarantee your success. If you feel the time given in the listing does not, you can always request more in your purchase offer or L.O.I..

9) Will the seller offer and sign a non-compete clause? A non-compete clause is one additional guarantee to your success.

10) Your attorney may have an important role in your decision to buy a business.  Remember, that your attorney can answer questions pertaining to your legal protection with documents. However, your attorney may be reluctant to answer your questions about purchasing a particular business. They are not business experts and most attorneys carry malpractice insurance because, if you ask them if you should buy a certain business and they  say "yes", if for any reason you should fail, you could sue them.

11) Your accountant will have an important role in your decision also.  However, do not expect them to have a crystal ball.  They can not guarantee or predict your success in a business. They can, and will, tell you what a businesses books actually reveal about the business and discuss the financial stability of the business. They can provide valuable information in your decision, but they can not make the decision for you.

12) At closing, if applicable,  you will have to pay sales tax on the furniture, fixtures and equipment.  You should look to your accountant for guidance.  They will help you determine the value for sales tax, but this also determines how much you can write off in the future as depreciation on your tax return.

13) Every business you consider will be different.  Not a single one will be perfect.  They will all have room for improvement.  Just remember, if you see one you like, time will be of the essence. Others may be looking and considering it also. They may be in their last stages of investigation and working on an offer. You can’t expect a business to sit on the market waiting until the time is right for you, because now just may be the right time for someone else. 

14) There are many tax advantages of owning your own business.  Most people buy their car out of take-home pay, business owners buy the same car out of pre-tax earnings.  Nationwide, most season ticket holders of sports and philharmonic activities are small business owners.  We call them vacations, business owners call them conventions or business trips. When you look at a businesses finances, you should compare your monthly expenses to those that the business “covers” for the owner and consider this additional  advantage income.

15) It will be your job to make all decisions. Although you can have qualified individuals working for you, the ultimate decision will be yours. You will need to step into the role of decision maker without hesitation. After all, you are going through this process to become the “boss”. You should start acting like a qualified boss early in the buying process.

16) After your offer has been accepted and the additional deposit has been made, all the contingencies must be removed within the set time frame. Then all licenses and permits are applied for and finally, closing. It is at this time your training period will begin.

17) Remember that buyer remorse can happen. On any major purchase, buyer remorse is something that can happen and is very normal.  Unfortunately once a deal is accepted and your Due Diligence is completed and accepted,  you are bound to the deal.  Try to get rid of your remorse before you put in an offer.

18) Talk to your personal advisors about every negative you can think about pertaining to the type of business that you are interested in, i.e. hours, complaints, rest rooms, seasonability, etc. You know that it will not always be a bed of roses, but if you are aware of the negatives, the positives become that much clearer and preparation is always necessary for proper prevention.

19) Know how to properly  tour a business.

A) Look at and see everything.

B) Ask the owner anything except price.

C) Never ask employee questions without owner's permission.

D) Tour neighborhood.

20) Learn  how to seek advice. Seek out owners of this type of business and ask them what they think of this type of business. Visit as many as you can. Even if you do not speak to the owner, you will get a good idea of what you like and what “works” for this business and you will see what your competitors  are doing. Keep in mind that it is never a good idea to let anyone know that you are looking to compare a business you may buy. They may try to discourage you as you will be another competitor.

21) Keep track of other businesses you have looked at.  Remember what you liked and disliked about that business. That will create a clear guideline for you to compare and evaluate a business. 

26) Finally keep in mind, owning your own business is the best savings plan that I know of, you build equity every month.  As your sales grow, so will your income and the value of your business.