|
Buyer Introduction
Going into business for yourself is a big step, one that can be full of apprehension and even fear. Almost 90 percent of all those who purchase a small business have never owned a business. Most of them bought a business that was different than what they had been looking for. These buyers had the opportunity to explore the marketplace and subsequently found a business more to their liking. In most cases, the seller helped financed the sale.
As you begin your search, keep in mind that running your own business is more than a job; it is a lifestyle change. In most cases, it is a very big lifestyle change. Usually, you will be working longer hours, making all of the decisions, and, as the expression goes, "you will be the chief cook and bottle washer." In other words, you will be doing all of the work from running the business to, in many cases, sweeping the floor and changing the light bulbs.
What To Look For
How long the business has been in business?
Any financial advisor will tell you that past performance is not an indicative of future performance. But a business with a long history of performing well suggests there are good reasons for it to be in operation. It will be well known in the area, and people will be used to patronizing the business or using its services. The longer it has been in operation, generally, the better the business.
How long the present owner has owned the business?
The longer the present owner has been in business, the more likely he or she has been successful. People don't stay in business if they are not making money.
Why the present owner is selling?
If the owner has been in business for six months, is 37 years old, and wants to retire, you should be suspicious. The more valid the reason for sale, the more realistic the seller will be in considering your offer. However, keep in mind that after five or six years or more, people do get restless, "burn-out" sets in, and people look for new challenges. Why the seller is selling is an important question to get answered.
Why books and records are important?
The financial records are a good indication of how well the business has been doing over the years. Keep in mind that tax records are not designed to show the business in the best light: no one likes to pay more taxes than they have to, and owners of businesses are no different. Generally, tax returns are a worst case scenario. You need to be able to look at the expenses and discover which ones are non-cash items, such as depreciation, and business use of home and vehicles. How important was the business trip to Las Vegas? A professional business broker can point these items out to you. When in doubt, however, seek outside assistance.
Again, keep in mind that financial records are only history. There are no guarantees that they will or can be duplicated or repeated. All of your profits are future. In the final analysis, the financial records of the business are an indicator of what the business has done; what you do with its future is up to you.
How to determine if the seller is reporting all income?
The simple answer is - you can't. Not reporting income is against the law. You should consider only the income that the seller can show you. We all know, of course, especially in cash type businesses, that there is the possibility that the seller is not reporting all of his or her income for tax purposes. This "underground economy" has been well-documented and is in the billions of dollars. Many sellers will tell you about how much they are "skimming," but you should ignore their statements unless they can be substantiated, since you have no way of proving these amounts. In determining whether a business is the right one for you, you should base the decision on physical documents supplied to you by the seller.
Are external factors important?
Just about anything can effect the future performance of your business . Is a competitor moving into your territory? Is the towns primary employer closing? It is the buyers responsibility to investigate and uncover any hidden factors that may place his or her investment in jeopardy.
The Bottom Line
Being in business for yourself can be a daunting prospect. There are no guarantees. At some point, after all of your investigation is completed, you will still have to make that "leap of faith" that is necessary to proceed with the purchase of the business. You will have to work hard, perhaps even "tighten your belt" a little and perform many different jobs to be successful in your own business. But, if running the show, making your own decisions, not having to worry about job security (remember, no one can fire you from your own business), and just being on your own are important - then owning a business is for you. After taking that leap of faith, almost all business owners will tell you that they would never go back to being an employee.
| 
