What to Look for When Buying a Business

Buying a business can be a daunting prospect. You become responsible for your own successes and failures and ultimately the buck stops at you. There are no guarantees that you will succeed or be happy. At some point, after all your investigation, analysis and due diligence is complete, you will still have to take a leap of faith and close the deal.

Fortunately, most business owners I’ve met will tell you that they would never go back to being an employee. If you are considering taking the plunge, here are some factors that you should consider when searching for a business that is right for you.

How long has the business been established?

A business with a long track record generally means that there are good reasons it will continue to operate and be profitable. A good reputation in the area, customer loyalty – these are all signs of a good business that will give you a springboard to success.

Why is the owner selling?

If the current owner has been in business 6 months, is 39 years old, and wants to retire, you should be suspicious. Look for a seller with a valid reason for sale. These sellers will generally be more realistic in negotiating a fair deal and are not just looking to unload their problems on an unsuspecting buyer. However, keep in mind that after five or six years or more, people can burnout or get restless. They sometimes are just looking for new challenges. Why the seller is selling is an important question, and you should try to get the real answer.

Are there accurate books and records available?

The financial records of the business are a good indication of how well it has performed in the past, and are the basis for your projections on how you might do in the future. Keep in mind that most privately owned business accounting systems are not designed to show the business in the best light, but rather minimize the taxes that the business owner will have to pay. Most business owners will want to take as much money out of the business as they can while paying the lowest amount of taxes allowed. Generally, the tax returns will show the worst-case scenario.

An analysis of the expenses of the business will determine which items may be discretionary and are not necessarily required to continue the business going forward. Search for items of personal benefit to the owners such as personal vehicles, travel expenses, excessive salaries, family and spouse salaries, etc.

Ideally, a professional accountant will have prepared the statements. If not, more due diligence may be required on your end before completing a sale. Keep an eye out for poor records, unexplained line items, or significant discrepancies year-over-year. Any of these findings may point to signs of trouble in the business, or issues that the seller may be hiding.

Ultimately, you must remember that you are using historical financial records to show what the business has done in the past. What you do in the future is up to you. There are no guarantees that the past will or can be duplicated or repeated.

Is the seller is reporting all income?

The reality is, you will never know for sure. You should only consider the income that the seller can prove to you in your analysis. We all know that, particularly in cash businesses, there is the possibility that the seller is not reporting all of their income for tax purposes. Many sellers will tell you about how much they take on the side, but you should ignore their statements and base your analysis of the business on what they can document. In most cases you will need a bank to help you finance your purchase. Good luck getting financing for unreported cash income.

Can I see myself running this business every day?

Many buyers spend too much time analyzing financial statements, projecting the future and negotiating the deal, and fail to think about whether this is what they really want to do. Buying a business is a major commitment. Even if it makes sense financially, it doesn’t mean that it’s right for you. It’s extremely important that you get comfortable with what you will be doing on a daily basis and determine if you can see yourself doing this for the foreseeable future.