Crucial Guidelines On Benchmarks When Buying A Business For Sale

May 7, 2010

Don’t have any confusion about it, buying a business for sale is a multi-step process with each step being essential. Many times you may not proceed to the next position until you complete the preceding step and you should never be tempted to short-cut the process at all. 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. One of the most important questions you must ask yourself before you go forward is what kind of enthusiasm you possess for the type of business you have your eye on. 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.

A process of due diligence requires you to inspect all kinds of 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 information on individual behavior, attendance, length of service and pay scales.

* Licenses: including federal, state, city, county as appropriate, plus any certification licenses you must possess to operate the business. Be prepared to consult records independently to see if there have been any discrepancies or problems in the past.

* Equipment records: including age, depreciation, maintenance, replacement cost, and any required inspections.

* Inventory records: re-saleability, turnover and overall condition.

* Supplier contracts: are they transferable, do you have alternatives and is there goodwill?

* Property records: including rental agreements and portability – the latter element is of considerable importance.

If you find that all records, licenses, contracts and agreements are in order and are workable for you going forward, you may be wondering how to arrive at a good value when you buy business assets. A number of different ways to look at this exist. Here are some of the methods commonly used to calculate:

* Asset-based multipliers, where assets are totalled and value is determined.

* Rule of thumb, where industry benchmarks are used to establish the value (not recommended).

* Revenue-based multipliers – a percentage is applied to monthly or annual revenues (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 method is most commonly used to determine the value of a business.

While there are many documents and figures that can be proven to backup an owner’s claim, or not as the case may be, you need to take into account significant facts. 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 President and founder of the prestigious Diomo Corporation – The Business Buyer Resource Center. His celebrated materials, seminars and consulting have encouraged thousands of aspiring business buyers from around the World to pursue their dream to buy a business.

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