Buying an existing business is often easier than starting from scratch. But scratch you must to dig up relevant information that may not be readily offered by the existing owner or business broker. Before making any important decisions, check the numbers and ask pointed questions.
- Study the financial records provided by the current business owner, but don't rely on them exclusively. Instead, insist on seeing tax returns for at least the past three years. Also ask for the sales tax records, where applicable.
- Find out how the owner determined the asking price. Together with your accountant, decide whether assets and expenses were realistically valued. Business owners often assess outmoded assets overgenerously or fail to recognize changes in the neighborhood and their impact on property value.
- Who are the employees? In a family operation, salaries may be unrealistically low, resulting in a bottom line that's unrealistically high.
- If you plan to change the image of the business, will the current inventory still be valuable to you? How will changing the business impact the existing customer base?
You may not be able to answer all these questions satisfactorily, but addressing them can guide your decision to pursue the purchase and give you better bargaining leverage.
Paul DeCeglie is a former staff reporter for Journal of Commerce and American Banker. He can be reached at MrWritePDC@aol.com