selling a business

Before You Buy a Business

Businesses are bought and sold each day and some make better investments than others. Before you buy a business, here are a few things to make sure you make the right move:

Why is the seller selling? There can be many reasons why a business is for sale, and some reasons are better than others. For example, if the business owner is retiring, that is a good reason, but if the owner is selling because they are not making much of a profit, then that is a negative sign.

Do you know the industry? If you worked for years as a general manager of a restaurant, then this would provide you with a good base of knowledge of how to run a restaurant. The same goes for any other industry.

Due diligence: You should not just take the seller’s word that the business is making a certain amount of money, as the seller should be able to substantiate it with information, such as bank statements and tax returns.

Seek the advice of a professional: Seeking legal, business, and tax advice can pay for itself over and over again. A good attorney will help to work out the legal agreements, while a CPA will help to advise on how to maximize the tax effectiveness of buying the business. I have seen business purchases after-the-fact whereas the new owner loses tens of thousands of dollars of deductions because it was not structured correctly. The agreements can be made so that both parties receive the benefits they are looking for.

The Hidden Retirement Asset

Financial advisors frequently mention the three main pillars of retirement, which are social security, pension plans, and personal savings. Yet, you rarely hear them speak about an asset that may prove to be an individual’s largest asset – their business.

Many business owners invest their money back into their business over the years, especially during the early year, which makes them appear to have minor savings at first. In reality, the returns of investing in a small business can potentially be far greater than any stock market returns. Of course, there are risks as well.

How valuable can a business be?  A business can be valued in several ways, such as a multiple of sales, profits, or the value of its assets, and each industry has its own ratios that it relies upon when coming up with a price. For example, if the net profit of a business is $200,000 and sells for 5 times profits, then the valuation would be $1,000,000. A part-time, home-based business may not be worth much at all, but a profitable restaurant, service business, medical practice or other well-managed business can be worth hundreds of thousands to millions of dollars.

Don’t Wait Until It’s Too Late: Selling your business at the right time will have a huge impact upon the selling price. For example, if you are nearing retirement and have health problems, then you may be forced to sell your business at a huge discount if you suddenly are not healthy enough to run the business. Worse yet, if you pass away suddenly, then the value of the business will usually drop even further.

Getting Top Dollar: Ideally, you should prepare for the sale of your business 3 to 5 years ahead of time. This will allow you to be in more control of cleaning up the finances and improving profitability. You will obtain a much higher selling price if your business is doing well and you don’t need to sell it in a hurry.