Buying a business could be your most important decision in life, but many people treat it in a cavalier fashion. Most people would consult a professional in any other major transaction, but don’t think of going to professionals for business purchases. With that in mind, consider using a reputable business broker.
A good broker can be found in your area simply by calling or emailing their professional association, the IBBA, or International Business Brokers Association. Or, ask friends who own businesses if they’ve had good or bad experience with a business broker in the area. Business brokers who have earned their profession’s highest professional credential will have CBI after their name on business cards. This stands for Certified Business Intermediary and assures the buyer that the broker has been properly trained and is held to high ethical standards.
If you don’t use a broker and represent yourself, then you must first determine that the business is right for you. Is it something you will enjoy doing? Then check the financial health of the business. After signing a standard non-disclosure agreement the seller should be willing to show you his tax returns for the past three years and allow you a chance to visit with his CPA.
Make sure that the business is brining in enough money to pay for itself, pay you a decent salary and cover its own debt service. If there is real estate involved this could be a 15 to 30 year loan. Without real estate, most lenders prefer seven year loans.
Determining the true value of the business and making sure that it matches the owner’s asking price is next. After looking at the tax returns and a profit and loss statement you should be able to determine true owner’s cash flow, which is net income plus discretionary spending from which the owner benefits, such as health insurance, a company car or a company owned cell phone.
Take the cash flow and multiply by two, then add in the wholesale value of any inventory, fixtures, furniture and other odds and ends. This will show you the value of the business itself. If there is real estate involved, hire an appraiser and add in that figure. These rules of thumb hold true for most businesses, but when you talk to your banker or SBA representative you may find some exceptions.
Determine how much of the purchase price the owner is willing to carry as owner financing, and if the amount seems reasonable, your next and final step is to find an attorney who is experienced in business closings. Have him check the contract carefully and you are usually in good shape.