What to Consider Before Buying a Business

It can be the best way to invest in yourself, as long as you've done your homework.

By Ed Pendarvis

Opinions expressed by Entrepreneur contributors are their own.

I believe with all my heart that you're better off buying an existing successful business with trained employees, an established customer base and an existing "cash flow" sufficient to provide a good living, than you are starting up a new business.

How do you find a good business? Because of the confidentiality of a business sale, (unlike real estate; you never put a "For Sale" sign out front), my suggestion is that you contact a business broker in your area that is a member of the International Business Brokers Association, visit them and let them introduce you to several available businesses.

The most important thing is to find a business that you like and feel that you can manage. If you hate to get up and go to work every day, you will have a major problem no matter what kind of business it is or how smart you are.

Unlike real estate where we say the three most important things are location, location and location, in buying a business, the three most important things are location, track record (including trends of sales) and management.

Visit with the seller and ask a lot of questions about the business; how long he or she has owned the business; how things are going and why they are selling the business.

Be aware that there are several value drivers of the business:

  • Location
  • Furniture, fixtures and equipment
  • Inventory
  • Trained employees
  • Established customer base
  • Existing cash flow(sufficient to pay expenses and make a living)
  • The industry itself (future market for product/service)
  • Competition
  • Financial records and representations by seller
  • Your plans for improvement

Expect that getting financing for a business acquisition will be difficult, especially in today's market. The business broker can be very helpful in this area. Also expect to negotiate the selling price, terms and conditions so that they work for you and the seller.

In purchasing an existing business, you are buying an income stream. The cash flow should be enough to pay the new debt service to the bank, SBA, seller or whomever, and still make a living for you.

If you can buy a business with a down payment of X dollars and the cash flow will pay the debt service, leaving you with X dollars every year, then you have 100 percent return on your investment and the business is paying for itself. Where else can you get that?

When you buy your own business, you have accomplished three very important things:

  • You have a job for life. (You probably won't fire yourself.)
  • You have the opportunity to make more money. (Most big businesses started off as small businesses.)
  • You are building equity in something that you can sell when you're ready to retire.

I believe in the value of small business to you, to our communities and to America--yesterday, today and tomorrow. Invest in a sure thing--invest in yourself.

Ed Pendarvis is the founder of Sunbelt, the world's largest network of business broker offices.

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