Once a business listing has caught your eye, buying a business is the best way to become an entrepreneur. However, it all depends on whether you know what to look for. If you do, you don’t have the hassle of developing a business from scratch.
Unfortunately, business listings are like car listings. They are everywhere, but some of them are lemons. You have to make sure you don’t fall for a bad bargain. As such, you need to investigate any business for sale before agreeing to the purchase terms.
These tips can help you differentiate between a clunker and a good business deal.
- Why is the Owner Selling the Investment?
You need to understand why the business is for sale. The simplest way to get this information is by asking the seller. However, you’ll need to be smart. Don’t take their word as the gospel truth just yet. Confirm their statement by engaging other stakeholders in the industry.
Such stakeholders may include the realtors in the area, as well as other businesspeople, suppliers and locals. Make sure they are familiar with the operations of this business. Check whether the reasons they offer agrees with that of the owner. Often, if you’re looking at businesses in a local community, such as businesses for sale in Miami, you’ll be able to get a good sense of the reasons a seller wants to buy a business just by talking to these people.
If the store operates in a mall, engage other tenants in the mall. Keep in mind that their departure can have a serious impact on the nature of this business. It could be that the management wants to increase the mall rent charges, which may be too high for the business.
- What’s in the Asking Price?
Seek clarification from the owner on what it is that they are selling. Take stock of the assets to buy and the ones you won’t be buying. Have your accountant or auditor itemize these assets. From the itemized lists, it will be easier for your auditors and accountants to value all the assets on sale. If anything is unclear, be sure to seek clarifications.
Also, ensure that these assets don’t have any charges against them. Failure to check any liens or charges on these assets may mean you want to acquire other people’s problems. Some business owners will list other intangible assets for the business, the most common of these being goodwill. The sellers will always overvalue their goodwill. As such, be careful to ensure that you pay for what you’ll receive.
- Do Your Due Diligence
Before finalizing any business purchase transaction, you need to be sure it’s the right choice for you. Have a team of experts to help you evaluate this business. Some important aspects to consider include the past financial statements.
Compare these financial records with the tax statements you can get. Where you find a mismatch between the two statements, seek clarification. Maybe the accountant was using creative accounting to evade tax payments. This should be a big worry for you.
Other than these documents, consider having an auditor review the business. The auditor analysis will help you determine whether the financial statements are genuine or not. At times, it’s safer to have an independent auditor do the auditing for the company. Seek to see all the documents that were uncovered during the auditing exercise.
- Evaluate the Business Worth
The business value indicates the figure you need to pay for the purchase. Choose the best valuation technique that will give a near accurate price. With this, you’ll get a range of prices that may be suitable to offer as the purchase price.
Compare the valuation report with the seller’s asking price. The rates to pay should depend on the value of the entire business. That is the amount of money you expect the business to give back as returns. Examine the financial statements and record to project the incomes and expenses of the company. This is the best way to buy a business. Put simply, you will be buying the annual profits.