7 tips for buying a business

7 tips for buying a business

By Joseph Anthony -- Joseph Anthony is a tax professional in Portland, Ore., who writes about finance and tax issues affecting small businesses. Send Joseph an e-mail.

My classic picture of the small-business entrepreneur is of someone who goes through the expense, sweat and toil of starting a retail establishment.

On opening day, this person spends much of his or her time wondering if anyone will come through the door.

But I am well aware, however, that there's another popular path for small-business

entrepreneurs: buying a going concern from someone else who went through the work of starting a venture. (I'm not thinking of franchise operations here. Franchises come with their own special issues and problems, which I examine in a separate column.)

So, if you're thinking of buying a business, this story is for you. Here are my seven tips:

1. Remember that you're buying a lifestyle and livelihood too. Business brokers point out that many buyers of small businesses aren't just buying assets and inventories and leases."You have to look at the fact that you're buying a job and, hopefully, a decent return on investment," says Glen J. Cooper, a certified business appraiser in Portland, Maine. "So part of what you'll want to do is look at how much you can realistically expect the business to be able to pay you for your work, and also how much of a return on your investment you can get in the form of additional profit beyond your own compensation."

2. Look for seller financing.

Banks often aren't willing to make loans for the purchase of a business, which makes seller financing essential. Business brokers say that down payments of 30% or more are not uncommon.Cooper says it's usually a good sign when a seller is willing to finance the sale with a low down payment. "A low down payment ? say, 20% or less of the purchase price ? indicates faith not only in their business but in your own prospects as the buyer of the business."

3. Remember the business obligations of those brokering the sale. "Even though the broker may be an honest person and answer all of your questions honestly, most of the time the broker works for the seller," Cooper says. "You cannot lose sight of that."

4. Get your own professional advice, and expect to hear some warnings. Brokers say that even if you want to negotiate a purchase without the help of a broker, you should still look to other pros for help. "I strongly, strongly advise hiring professionals like attorneys and accountants to help you with the potential legal and financial issues or pitfalls of any purchase," says G. B. "Nick" Nicholson, business broker and owner of Atlanta-based Nicholson & Associates."I think you should expect that those advisers are going to

be negative, because that is what you pay them for ? to tell you everything that could possibly go wrong," he says.

5. Consider linking the final price to customer retention. With many service-related and other small businesses, a significant part of what you're buying is the existing client base. With some business sales, the agreed-upon price is based on retaining customers, or a certain percentage of customers, over a period of time. Part of the sales agreement could include a drop in the price if the customer base declines after you take over.

6. Get the seller to stick around, too. In most cases, you should have the previous owner stay on during a transition period following any sale. Nicholson says that with some small businesses, this phase could be as short as a couple of weeks. "But," he adds, "if you're buying something like a wholesale distribution company with a lot of customers, and you want to meet the customers and have the prior owner available for introductions or consultation, it could be a period of several months."If the purchase price is partly based on existing customers also sticking with you after the transition (see No. 5 above), that could act as an incentive for the seller to help you through those initial stages.

7. Do your own research on the business's valuation. Because business brokers are valuing enterprises all the time, they're likely to be better at it than someone like yourself who may buy only one business in the course of your career. But that doesn't mean you can't educate yourself in advance about ways of valuing a prospective purchase. Two Internet sites you can turn to for some rules of thumb are Bizcomps.com and BVMarketData.com.