What You Should Look for When Examining a Business
AVOID PAYING TOO MUCH. One of the biggest concerns in buying an existing business is paying too much for it, as compared with what it would cost you to start a new business from the ground up, or what someone else is likely to be willing to pay you if you decide to sell out. Even if the business turns out to be a good one, if you overpay significantly it may take years of hard work to recover this "hidden" cost of doing business.
When buying a business, the following basic rules should be followed, and if all three can be accommodated, you probably paid the right price. Remember the 3 R’s.
The business should provide sufficient cash flow to pay you a REASONABLE SALARY for your time. If it doesn't, stay where you are, you might be better off. The business should provide enough cash flow to allow you to REPAY THE DEBT if any part of the purchase price is financed, either by the seller or an outside lending institution The business should provide you with a REASONABLE RETURN on your invested down payment. Otherwise, keep your money it where it is.
Before you make an offer to purchase a business, review this with your accountant or accredited business broker. If your consultant is comfortable with the price, and you are comfortable with the price, the price is right. It will also give you piece of mind knowing that you have obtained a second opinion.
ARE YOU GETTING ALL THAT YOU BARGAINED FOR? One of the key items in investigating a business is finding out what makes it tick, and make sure you are buying that, whatever it is. For example, if it appears that the business has well developed customer lists or mailing lists, those should ordinarily be included in the sales agreement; if there are favorable leases or other contracts, make sure they can and will be assigned to you as the new owner. If patents, trademarks, trade names or certain skilled employees are vital to the business, be sure that you will get them as part of the package. And, in many cases, you will want the seller to sign a non-competition agreement, so he or she won't simply continue the business across the street under a different name, financed with your money!