Helpful Ideas On Benchmarks When Buying A Business For Sale
Don’t have any confusion about it, buying a business for sale is a multi-step process with each step being essential. You should never think about proceeding to the next position until the preceding step is complete and whatever you do, don’t be tempted to short-cut ever. You can view any time spent in preparation and in the revelation of facts and figures about the business to be well spent and as such you will be ensuring that no horror stories come back to haunt you when you take over.
Before you even start to talk to a prospective seller, a great deal of information can be revealed. But hold on for just a second, are you really sure that you possess the level of enthusiasm you need for this type of business? Is the industry that you are looking at of particular interest to you and do you really want to get actively involved in everything that it represents? Be advised, that unless you want to be a completely “absentee” owner and are considering the many additional steps that you need to take if this is the case, you should be enthusiastic about the business that you are getting involved in.
When you are conducting your due diligence, make sure that you inspect all documentation:
* Financials: these documents will include balance sheets, payroll records, tax reports, reconciliation documents and profit and loss statements. If the seller claims a considerable amount of “cash sales” but cannot point to these within tax declarations, then they cannot be counted and you must ignore them.
* Employee records: including longevity, pay scales, behavior, and attendance.
* Licenses: these will include county, city, state and federal licenses, as well as any certification you need to operate the business. It would be in your best interests to look at records independently, certainly if you believe there may have been any problems in the past or possible discrepancies.
* Equipment records: detailing the age, cost of replacement, any required inspections and associated results and details on maintenance investments.
* Inventory records: re-saleability, turnover and overall condition.
* Supplier contracts: including portability, alternatives and goodwill.
* Property records: including rental agreements and portability – the latter element is of considerable importance.
When you have inspected all agreements, contracts, licenses and records, you may find they are in good order and will work for you and then need to turn to the question of setting a good value as you buy business assets. There are many different ways of looking at this. Here are some of the methods commonly used to calculate:
* Asset-based multipliers, where assets are totalled and value is determined.
* Rule of thumb – this is not a recommended approach, as industry benchmarks are used to determine value.
* Revenue-based multipliers, are where a percentage or a multiple of the monthly or annual revenue is used. Again not recommended.
* Cash flow multiplier – where the business owner’s profit is added to the salary and realized perks, with a number of expenses deducted. This is most often the most appropriate way of valuing the business for sale.
Any number of documents and figures can be used by the owner to back up a claim and it is up to you to take these at their value and determine the appropriate conclusions. You need to look at the reputation and age of the business, what level of competition you may expect, the existing legal structure, quality and physical location of the premises and last but by no means least, the difficulty in obtaining a new lease. When looking at a business for sale, take everything into account as you determine whether you should buy a business like this.
Richard Parker is the author of the How to Buy a Good Business at a Great Price series. As President and founder of Diomo Corporation – The Business Buyer Resource Center, his materials, seminars and consulting have helped thousands of business buyers realize their dream to buy a business.
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