Buying a business is no easy task. Owners who decide to put their business on the market must address the factors involved in appealing to as many buyers as possible. Often, business owners are so wrapped up in the worries of day-to-day operations that they fail to clearly assess the value of their business from outside perspectives. A business may need improvement prior to selling. Consider the following in regard to whether a business is a good purchase prospect.
The business’ profit history is the most important factor in the decision to buy a business. Buyers should examine, on average, three years’ worth of profit and loss statements to determine whether sales revenues have shown a consistent upward trend. In addition, operating expenses should only have increased concurrently with an upward trend in sales. If the business’ assets exceed liabilities, that is a sign that the business is financially solvent. Solvency issues arise when the business struggles to meet its expenses via sales revenue.
Assuming the business owner doesn’t work from home and is not the landlord of a standalone building, the next most important consideration is the business’ lease. How much does the owner pay each month to his or her landlord, and is that amount competitive? Does the owner have options to renew? A buyer should find out if the lease may be transferred. You, in general, want to avoid a situation in which you must negotiate a new lease with a landlord. If the business equipment is leased, ask yourself the same questions. Are the leases transferable? If not, you may wish to urge the seller to renegotiate his or her leases prior to the close of escrow.
One key concern regarding clientele is the reliance or non-reliance on key clients or customers. A buyer should know whether the business’ roster of clientele is diversified, or whether the owner relies only on a handful of large clients to satisfy the business’ needs. Often, when a new business owner takes over operations, key customers may leave if the business had hitherto operated on the goodwill of the relationship between key customers and the previous owner. A buyer should also inquire into whether any long-term client contracts come into play, and whether the business keeps a client roster up-to-date within a database that will be easily accessible.
Next, you will want to know whether key employees are willing to stay on to assist you, a new buyer, during a transition period. The success of your transition period will depend on whether current management or staff is willing to help you. You’ll want to know if an owner is planning to set up shop someplace else in town and if key employees are intent on following him or her to a new location. You don’t want the best and the brightest talent in the business to leave after the owner has handed you the keys.
Last, assess whether the business’ products or services are superior to that of the competition. Questions to ask are whether the business uses any sort of proprietary production method that differentiates it from the competition, or whether a mode of delivery can be easily adopted by a new buyer. An organized operations manual can help a new buyer acclimate to the variety of products the business offers.
After you assess your target business according to the above steps, it is up to you to determine whether the business is a good sales prospect. Your consideration of these factors could mean the difference between success and failure.