Lost your job? Tired of working for someone else? Want to control your own destiny? These are among the reasons people choose to own their own business.
Before proceeding, you need a viable business model along with experience and passion. Is it Lost your job? Tired of working for someone else? Want to control your own destiny? These are among the reasons people choose to own their own business.
Before proceeding, you need a viable business model along with experience and passion. Is it better to buy a business or start from scratch? Today, we’ll examine the basics of buying a business and in two weeks we’ll investigate starting a new venture.
Expect to pay some multiple of expected cash flows when buying a business. In a service-based business, you are paying for the customer base, reputation and expertise. In a product-based scenario, you are also buying equipment and inventory. All else being equal, the better the growth trend, the higher the cash flow multiple you will pay. As a general rule, anticipate paying two to five years of net cash flow.
Heed the expression “buyer beware.” If tax returns and financial statements don’t match, watch out. You may forego a full-blown audit, but at least have a CPA review the seller’s records.
When the accountant reviews the financial statements, ask to see the owner’s salary, compensation and perks. Replace those numbers with yours to see how the business will perform under your ownership.
Consider any debt you will incur as a result of the purchase. Debt repayment will lower cash flow for a period of time. It’s usually easier to borrow for an established business than for a start-up. In fact, many sellers will provide some financing. Seller financing means the owners are more likely to help in the transition; they have a vested interest in your success. It’s also a sign that the seller provided accurate financial information.
Reputable business brokers can help locate businesses for sale, but check their references. Brokers are paid on completed sales; their goal is to create a transaction that satisfies both the buyer and seller. When approaching a broker, explain your goals, the type of business you are interested in purchasing and the amount you are willing and able to pay.
Consider the risks and rewards when buying a business. If you buy a business that generates 80 percent of its cash flow from a few customers, what if one leaves? What if the seller chooses to ignore your carefully crafted non-compete clause? Talk to others in the industry and unbiased advisers to identify other potential pitfalls. On the other hand, trained and dedicated employees and the infrastructure of an existing business can be a plus. And how many years would it have taken to develop the customer base that you can now nurture and grow?
If you are comfortable with the risks and see that the business can succeed and thrive under your ownership, you’re ready to buy.
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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.
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