3 Tips for Buying A Business
This brief Q&A provides 3 tips to consider when buying a business.
Should I consider buying a business and how much should I pay for it?
Remember that a business is worth only whatever someone is willing to pay for it. Generally, you should start the valuation process by estimating the net positive cash flow for the next 3 to 5 years, after subtracting an appropriate salary for yourself. Then determine the appropriate multiple of earnings to use to arrive at a fair valuation. Most small businesses sell for a price in the range of 2-5 times earnings before interest and tax expenses are deducted. Always keep in mind that a business buyer is really buying a stream of earnings; without an earnings stream, the business essentially has no value.
How can I get a seller of a business to show me their books?
Ask them. If they are really interested in selling, they will show you their books. In reviewing the books, you should carefully consider all information presented during a detailed due diligence process. Keep in mind that most businesses have some negative features that the seller is reluctant to talk about and these will only come out as you begin analyzing the business (due diligence). Remember that numbers on paper aren't always reliable. Be sure to check against verifiable and independent sources whereever possible, such as bank statements and vendor statements.
What should I consider about Franchising?
Evaluating franchises requires as much” due diligence” as purchasing an existing business. Franchising is a popular way for entrepreneurs to fast-forward their small business ownership ambitions. A franchise keeps you from having to invent the operational wheel. Check with the International Franchise Association about the businesses available in today’s market. Also understand that a franchise is not a guarantee against failure.