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Finding The Right Business
Some Buyers have a very definite idea of the type of business they are looking
for, but for many this is not the case. Most Buyers have never bought a
business before or run a business of their own, as a result few have a solid
understanding of what they want or are getting themselves into.
Whatever business you decide on you should always know exactly how you will
be spending the majority of your working day. What will your role be and
are you suited to that role. If your thinking of entering a field that you
are unfamiliar with be sure to spend time with people who have that experience
or better still seek employment in that industry yourself to gain some experience
beforehand. Similarly you must decide on the key characteristics of your
targeted business, for example:
- Hours of Operation – are you OK working evenings and weekends
or do you want a 5 day a week operation?
- The size of the business – can you handle a business with many
employees and do you want to or would you rather be a one man show?
Profitability & Affordability
How much profit do you need a business to generate to cover your basic needs?
Any acquisition should be able to provide this and hopefully more. Most
individual first time buyers are replacing a guaranteed salary and benefits
with the uncertainty of business profits. You must make sure your can afford
the acquisition. Give yourself a cushion, keep some savings back and remember
you will need some cash for working capital even if you are buying the Accounts
Receivables. Assume there will be some unforeseen problems and manage to
that scenario.
If you are working with a reputable business brokerage, like The Novars
Group you will find that the business information on your target business
is prepared and well organized and you will have ready access to all of
the information you need to make an informed buying decision. Regardless
of who you are working with you should always:
- Insist on seeing income tax and sales tax returns for the last few years,
and match these to the businesses financial statements. The “cleaner”
the financial records the greater the likelihood that you will be buying
what you think you are buying.
- Be very careful when the seller tells you that he shows a low income because
he takes cash from the register. Even if this is true you should never pay
a premium for a business based on this. Only pay for things you can verify.
- For most small business owners an objective is to minimize the income tax
effect on profit. As a consequence many owners will write off everything
they can. The business broker should have professionally re-cast the business
financials to reflect its true underlying performance. Be sure that any
reconstructed financial statements are fully reconcilable to the actual
statements and tax returns.
Avoid Paying Above Market
One of the biggest concerns you have in buying an existing business is
paying too much for it. Even if the business turns out to be a good one,
if you overpay it may take years of hard work to recover this "hidden"
cost of doing business. Look for the seller to show you a professionally
prepared business market valuation report and check out the credentials
of the valuer. Before you make an offer to purchase a business review
this with your accountant. If your advisors are comfortable with the price,
and you are comfortable with the price then move forward, if not find
out why the seller believes the price is right, you may be missing something,
if this does not satisfy you then either offer what you believe is the
right price or move onto the next opportunity. Remember also that unless
you have a Finders Agreement with a Business Broker he/she will be representing
the interests of the Seller. The Novars Group pledges to always represent
a business fairly, but even so you should always seek fully independent
advice.
Finally
Do Not Buy Surprises
Do your homework on the business and on the industry. Know what will be
expected of you as the new owner and be sure you are up for the challenge.
Be sure you can afford the business, the down-payment, the financing costs
and the time commitment.
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