Before you purchase any business you need to ask 3 questions. But, not just any questions…the right questions. First rule of thumb, do not ask the question, “Why are you selling the business?” Their answer regardless of what it is will be a lie. They will say things like, my health, other business interests, I am moving, my wife wants me to sell but in reality the reason why they are selling is that it is not making them the kind of money they want.
- What is the worth of the assets of the business? If the business assets are worth less than the asking price ask yourself what are you buying? Opportunity? Do not buy opportunity because you can make your own, buy assets.
- What is the budget breakdown for the year? You want to be able to see on paper where the income is coming from and where your expenses are going.
- Do you have the financial records to back up these numbers? When people are selling a business they lie. Or they stretch the truth just as far enough to where it is believable. You need financials to keep them honest and to keep you from making a bad investment.
When buying a company everything boils down to numbers. Do not get caught up in the hype, if the numbers don’t look right walk away from the deal.
Nearly all small businesses has far less in assets than the purchase price so goodwill is a major issue but it is so arbitrary. I spent a year looking for a business and bought a distribtion business in April which has been doing very well even with this economy. I negotiated a really good deal with a perfomance clause which limited my risk and so far i am really pleased. You’re right about the numbers and what crap some of these sellers try to put over on a buyer-it’s crazy!! I did find one great resource at diomo.com – how to buy a good business – their guide for business buyers was a huge help to me. Stan W
That is great input Stan. Thank you for taking the time to share the information. I learned the hard way about sellers forging fake projections and budgets. The budget revenue was about $300,000 over actual numbers. It was a very tough year to say the least.
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