Are you thinking about buying a business? Have you purchased one before? Well buying a business today is considerably different than buying one before 2008.
Thanks to this incredibly unpredictable economy the rules in valuation have changed and you'd better be up to speed on the changes or risk paying significantly more than you should.
Of course if you engage the services of certified business brokers you can rest assured that you'll get the best deal possible.
However, if you strike out on your own you have to know at least these seven tips for buying a small to mid-sized business.
1.
Require seller financing Before the current financial crisis, entrepreneurs looking to buy a business had several sources to obtain financing including the equity in their home.
Lending has seriously dried up and sellers of a business are going to have to be willing to carry back all or part of the purchase price.
2.
Think about using an earnout as a method of payment Earnouts make sense when a company with a profitable past has hit a slump in business.
Obviously the seller wants to base the price on past great performance and the seller wants it based on today's numbers.
Earnouts are agreements to base the payout, and consequently the ultimate price, based on performance after close of escrow for a designated amount of time.
3.
Consider the cost of making improvements This is something akin to buying a home that desperately needs a new kitchen.
Your purchase price should take into consideration the cost of a kitchen remodeling.
With a business, those "remodeling" issues could include employee relations, customer service effectiveness, website, reputation in the community and any other issue that you will have to invest in to "fix".
4.
What expenses are renegotiable If there are leases involved, when do they expire and what's the trend in the leasing market in your area.
The same goes for contracts with vendors.
If you think contracts and leases can be negotiated downward you can include that in your valuation of the business.
5.
Know the real value of inventory being purchased If 20% of the inventory has an inch of dust covering it because it is outdated or simply a dog, don't include it in the value of the business.
Either pay the owner pennies on the dollar or work out a consignment deal where you pay the owner as it is sold.
6.
Buy into the future not the past Know which way the industry you are buying into is headed.
Don't be the person who buys the best buggy whip shop in the country three days before Ford rolled out the first Model A.
Do your due diligence so that your business plan becomes a realistic blueprint for the future.
7.
Seek assistance from a tax professional Actually this hasn't changed so much since 2008 but it is vital that you know the tax implications of the purchase.
How you buy and how you pay and the liabilities you assume or don't assume can have a huge impact on the real cost of the purchase.
Sounds challenging doesn't it.
There had always been a fair amount of negotiating skills required to purchase a business but now those skills become much more important.
You can either tackle the challenge yourself or you can engage certified business brokers, the people who do it for a living everyday, to do the heavy lifting.