What to consider before buying a business | The Business Journals

Jun 17, 2016, 7:05am EDT

Every day we have individuals come into our office looking to buy a business. They have decided they are ready to step out on their own, work for themselves, and build an investment for the future.

These are all great motivating factors, but once the search begins, business buyers are quickly bombarded by numerous business listings and voluminous information on each.

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By following these steps, you will be doing deeper due diligence on only those companies… more

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A deer-in-the-headlights look can quickly follow, as they wonder what facts they should be considering. How should they direct, refine, and target their search?

If you might be considering buying a business, here is a way to prioritize your criteria to narrow your search and zero in on the right business for you.

Geography

We put this step first because it is a pretty concrete fact that most business buyers can easily identify.

It is rare that a buyer will relocate for a business, so starting with geography is a pretty safe and easy way to narrow the search. Whether you go as narrow as your city or as broad as your state, you will be illuminating a vast number of the businesses on the market.

Cash flow

Once you’ve settled on a geographic location, the next important factor is the cash flow of the business you will buy.

Cash flow is the profit a business generates, from which you will make monthly debt payments for the purchase of the business, with the remainder being your return on investment, or what you will live on. Simply figure out the dollar amount you need to live on an annual basis, and only look at businesses generating enough to cover that number and the debt service.

It is simple. If you buy a business that is not generating enough money, you will likely fail. There is no need to investigate any further unless a business meets your cash flow requirements.

Price

Consider the price. Some people will start here, but I believe that geography and cash flow are more important.

Just because you can afford the price of a business, doesn’t mean it’s the right fit. Price is usually a function of cash flow, so once you determine your cash flow requirements, you will quickly start to see the general range of prices you would be paying for a business that fits your needs.

If you get to this point and realize you can’t afford a business that meets your cash flow requirements, you may need to put your business acquisition plans off for a bit while you save more for your down payment.

Industry

Lastly, consider the industry and the experience you do or don’t have.

Does this industry interest you? Can you bring any experience? Do you have resources or contacts that could help you get traction? Even though I put this fourth, it is still very important in determining if a business is a fit.

Following these steps will greatly help narrow your search for a business in a way that helps find the best fit. Keep in mind however, that much deeper due diligence and investigation on your part will be required before you make the final purchase. But, by following these steps, you will be doing deeper due diligence on only those companies you know have the potential to be a great match for you.

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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.