Who do you know who wants to buy a business?
This week I had a couple in my office who wanted to buy a service business. They sent me the financials, which I analyzed, then we met for an hour. There were so many danger signs in this deal I don’t know where to begin. Not the least of which is the business nets less than $5k a year in free cash, and the asking price was over $200k. Do the math, – it’ll take over 40 years to pay this off.
There were a myriad of other risks in the purchase like environmental risk, location lease risk, and customer retention risk. Now don’t get me wrong, there are many opportunities and advantages of buying a business. You have to know what to look at and effectively assess the risks. Let’s look at some factors to consider.
When starting a business, the learning curve is steep and it requires significant effort to learn the industry. Depending on the age, maturity and lifecycle of the business, purchasing a business has the potential to this investment. Consider the history and biography of the business you are looking to purchase. How long have they been in the industry? How much knowledge and expertise has the business acquired and successfully implemented? Another factor to consider is how the intrinsic value of the business is calculated. Established businesses have financials, sales, costs and liabilities based on history. Ensuring the accuracy of these factors is critical as an over or under estimate can change the intrinsic value significantly. Ask your account to check these details for you.
When buying a business, people understandably get excited. Dreams and rose coloured glasses are common. This leads to a lack of due diligence. Spend the time, ask the experts, drill the questions. Look critically at all areas of the business: legal, financial, tax, regulatory, market projections, accounts receivable…dig into all these things. Oh, and budget for professional help to ensure you’re making a sound investment.
Before you or anyone you know buys a business, make sure you have it reviewed by an accountant who is qualified to do this.