Preparing to buy a Business is an emotional decision. When looking for the right Business for sale you have to be both realistic and open. There is no “perfect Business” as all Businesses have their positives and negatives. There is also no Business that is considered a steal at its price. If it appears to be a steal then beware – as there may be something negative lurking beneath the facts and numbers.
Look at the entire Business model. Not only should all financial figures be proven through financial statements but the entire Business should be open to you for review upon acceptance of confidentiality documents and rules. But there are certain Business related items that are not at your disposal. For instance, customer names, supplier names and employee names are not something you should ask for. In addition, you should have no contact, visitation or any other communication with that Business without the approval of the Business broker or if no broker then the owner.
Some things you should ask for include the complete financial history up to the last 3 years – if owned less than 3 years then adjust these requests accordingly. You should also be given asset values including individual values of equipment and inventory. It is also valuable for you to ask where the increased potential rests in the Business. Even though a value can’t be placed on potential, you should look into the Business’ potential for one main reason- DEBT SERVICE.
Debt service is defined as “Cash required over a given period for the repayment of interest and principal on a debt.” So while potential should not be part of the price of the Business, you should look at potential when considering the increased debt service associated with the Business loan that you will most likely need to complete the purchase. To keep the current annual cash flow – and hopefully increase it – the potential of a Business should be a key focus. If the potential is unrealistic or does not match possible debt service then either adjust your offer or simply walk away.
NO POTENTIAL = NO FUTURE
Look past the present and into the future but don’t pay for this trip!
The Business also has to work for you. When looking at the Business model you have to consider the owner hours worked and possible increased expenses in hiring to replace some of these hours. Replacing these owner hours with a manager DOES NOT provide valid reasons to decrease the annual cash flow of the Business – rather this represents expense potential that you should consider in any purchase.
So if the current owner works it then so can you – and if not then the decreased cash flow should come from your willingness to take less revenue and not be reflective in the offer process. In other words – you shouldn’t say “The cash flow is not $150,000 – it is $120,000 because I want to hire a manager at $30,000 per year thus the price should be reduced by $30,000”. The Business model has proven that hiring the new manager is now a discretionary expense.
But in the end – the offer IS what you are willing to pay for the Business!
BUYER BEWARE – if it looks to good to be true – it is!!!