Checklist for Buying a Business
Buying a business can seem like a daunting task, but a professional business broker can help you find exactly what you’re looking for. Here are some checklist items that will be necessary to get the job done.
Get the necessary financial information
Sellers must be able to provide books and records for their business. This includes business income statements, balance sheets and tax returns. All income and expenses must be traceable to original invoices. A lack of books and records makes considering the purchase of a business impossible.
Determine the value of the business
There are numerous ways to calculate business value. One method involves rules-of-thumb specifically related to the business industry. Publications are available for this information as well as online resources. You can also ask your business broker to perform a competitive market analysis. This process requires a professional that has access to nationwide sold data. A competitive market analysis provides significantly greater detail and support of value.
Finally, a full business valuation report can be generated. While this might be the most accurate measure of a business, it’s also the most costly method, since a licensed business appraiser must be hired. Full business valuation reports are rarely used for businesses selling for less than $1 million. To sum it up, price and value must match to make a business purchase viable.
Determine business asset value
The asset value of a business can be critical to funding the purchase. All lenders measure how much collateral value the assets can bring to the transfer. Many main street business opportunities have low asset value, which makes funding difficult or impossible. In these instances, the purchaser will seek financing from the seller. Assets can be valued a number of different ways such as replacement, fair market, liquidation and/or emergency liquidation.
Determine required working capital
All businesses require some amount of working capital to support business operation. Working capital can provide the means of making payroll when revenue is down or be utilized for purchasing inventory or materials necessary to complete a job prior to being paid for it. A lack of working capital can lead to business failure.
Investigate the business history
Purchasers need to fully understand how the business has arrived at the present point. Business history can include litigation, peaks and valleys of profitability, excessive customer complaints, a negative reputation or personnel problems. Knowing the business history allows the purchaser to determine whether it’s likely that he/she can maintain and/or grow the business.
Use the due diligence process to validate your decision to purchase.