Mainstreet Business Journal - View Article

Mainstreet Business Journal - View Article

By Byron Theurer

Not every would-be entrepreneur wants to start a small business from scratch. There’s a certain attraction to coming into a business that already has a location, name, permits, customers and cash flow. Moreover, compared to a start-up, there’s a much lower level of risk, but unfortunately this does not substantially increase the likelihood that bankers and investors will help you obtain financing.

None of this guarantees that the going will be smooth. At the same time the owner is looking for a suitable buyer, you are looking for a suitable business: one that’s in good shape with a history of profitability. The risks you may encounter may include obsolete inventory, uncooperative employees or outdated technology and distribution systems, and an over valued price expectation on the seller's part.

Here are 10 questions to aid your discovery as you consider the purchase of a particular business. (Many of them apply to purchasing a franchise as well.)

1. If I am actively considering a specific business opportunity, have I assembled an acquisition team with my broker, banker, accountant and attorney?
2. Why does the owner really want to sell the business?
3. What assets convey with the business? (Do there seem to be more fixed assets than it warrants?)
4. How much inventory is there? (For a business that sells a product, excessive inventory is a red flag.)
5. Will the owner help me learn the business and give operating help, at least for a while?
6. What aspects of the business are most critical to its survival?
7. How much cash does the owner need up front?
8. What is the best way of financing this purchase? Will the owner help with financing (for example, through leveraging the buyout)?
9. Has the business been appraised recently? Is the owner willing to show me the past three years’ balance sheets, income statements, cash flow statements and tax returns?
10. Has the company or its principals been involved in bankruptcies or lawsuits?

Hiring a business broker to help you find a business will usually NOT cost you a commission; the seller side typically pays that, but it IS negotiable, so take care to clarify those points up front. In some cases, the broker has pre-screened the businesses, or alternately he may provide significant insight into the negotiations. If the broker is sufficiently experienced, he'll have a keen eye for value, which could save your bacon in the long run. Learn from your broker; make him teach you the ropes, if you have confidence in him. Keep in mind that not all states regulate business opportunities and that even among those that do, definitions of “business opportunity” vary. That means some states require licensure to be a business broker; most do not. Check for broker knowledge and experience. These skills will stand out if you interview them carefully, and a little gray hair is always a plus.

A number of Internet sites provide information for prospective buyers and sellers of private businesses. They include the Online Business Advisor (onlinebusadv.com) and buysellbiz.com. A very good advisory resource is YorktownCompany.com. You can also find a variety of books, reports, reference guides and other tools at the Business Book Press Web site (www.businessbookpress.com).

Editor's note: All SCORE counseling is offered as a free and confidential community service. There are 389 SCORE chapters around the country assisting entrepreneurs. In southern Utah, SCORE is a member of the Dixie Business Alliance, Suite 127, the Udvar-Hazy School of Business, Dixie State College. Phone (435) 652-7741, or sign up for E-mail counseling atwww.score.org.