Beginners Guide to Buying a Business

Before you start down this path, ask yourself why you want to buy a business. Are you looking for an increased income or greater independence? Or both?

Are you paying out of equity (savings) or a mix of borrowing and equity? You need to know how much money you are working with for the acquisition.

 

Cash Flow Positive or Negative

Before moving forward with your search, if you are borrowing part or all of the finance, you must establish your monthly repayments for the proposed loan. This is the first payment your new business must make out of retained earnings (also known as net profit). If the net profit does not meet the monthly loan repayment, you will have to fund the loan out of your further savings. This is not satisfactory if the earnings from the business don’t eventually catch up and pass the loan repayment by a substantial amount. If this is the case with the business you are looking at, then walk away. It will send you bankrupt. It’s not worth the angst.

If however, the business is cash flow positive, meaning the earnings/net profit is greater than your repayments, then proceed, but always with utmost caution. Remember the business is going to pay your wage and future expansion out of net profit, over and above paying the loan and interest repayments. If you can’t see it paying a ‘wage’ to you great enough to motivate you, to put in the likely long hours, and possibly hard work and stress, then again consider walking away from this business and even consider changing the type/category you are looking for.

Obtaining the services of a good broker in your area will make this much easier.

A broker will ‘walk you through’ the processes you need to consider and will be there for you, at every step. Look on www.listabiz.com for a good broker in your area.

 

Look for a Business – Keep an Open Mind 

There are many different types of businesses. We have over 600 Categories, in fact!

If you want to buy a business in your County or surrounding area, use the ListaABiz map in either USA or CANADA. Double click on your State/Province, then your County/City.  The businesses for sale in your area will be the flags you see. Select those flags, go to the listing pages of those businesses near you.

Before you buy a business, it is important you either already know about that type of business or you learn as much as possible about that type of business. It is also important you will enjoy running that type of business. If you enjoy it and it inspires you, you will find expansion and efficiency easier to come by and therefore greater profit.

 

There is a Definite Advantage in Buying an Existing Business. 

You may acquire the business at a bargain price. The Owner may be selling because of health reasons, retirement or perhaps a marriage breakdown.

Buying an existing business will give you a business that works for its location. The systems it uses are tried and tested. It comes with existing customers. Key staff is on-hand, trained and likely motivated and if treated correctly, will stay.

The business comes with goodwill. This may be a reputation for varies qualities. Perhaps service – promptness of delivery – quality of product – uniqueness of product. This goodwill adds value to the bottom line of the business. The goodwill is the extra the owner is charging you over and above the ‘book’ value of the business.

 

Downside to Buying an Existing Business. 

If your due diligence is insufficient, you may end up paying too much for the business. Or the owner has misrepresented it to you. Perhaps the business has a bad reputation you did not pick up on. The location may be in flux. There may be changes occurring in the neighborhood you did not discover. Stock/inventory may be obsolete, outmoded, or simply run down. The hours may be too much for you. Some businesses are open 7 days a week. Some 24 hours a day. The stress of managing staff may be too much for you.

 

How much should You Pay For the Business?

Here it is most important to use an accountant to help you determine its current and future value. A good broker may also help you ‘value’ the business.

As mentioned above, a business is worth its book value plus intangibles, which will likely be goodwill. Tangible assets are the equipment and stock/inventory etc. Intangibles are subjective. An intangible may be the skill or reputation of the owner. Can you substitute or even better him?

You should be looking for a business with a good reputation, with happy customers.

The better the reputation of the business the greater the premium the owner will ask. It may well be worth the premium as it will possibly give you a head start advantage over the opposition.

Now you have decided to buy a business there are many more steps before you sign on the dotted line.

You’ve organized the finance.

You’ve found the business you like.

Now do your due diligence, and perhaps get the help of a broker.