Don't Buy a Business without great planning - and experienced professional help!
1. How long has the business been in operation?
A business that has been prosperous for a long time means they have been doing something right, It's well known, and they have a good, regular following. a good yardstick is - longer it has been in operation, the better the investment.
2. How long has the present owner owned the business?
The longer the present owner has been in business, the more likely he or she has been successful. People don't stay in business if they are not making money. Don't buy a business with no track record
3. Why is the present owner is selling?
If the owner of a business has been in business for six months, is 37 years old and wants to retire, you should be suspicious. The more realistic his reason for selling, the more realistically he will consider your offer.
However, keep in mind that, for some, five, six years or more after they buy a business they get restless or "burn-out" sets in, or people look for new challenges. Why the seller is selling should be given the consideration it deserves - find the real reason before signing.
4. Why the Books and Records are so important. Provable income
Provable records are your only assurance of a business' health. Take into consideration, if the present owner is no fool he is not volunteering top dollar on April 15th. No sane businessman tells the IRS he is making a killing. Generally, tax returns are a worst case scenario. Hire a sharp CPA, enrolled agent or tax lawyer that's knows how to tell honest fudging from a business that really wasn't making it.
QuickBooks is good to review in due diligence. Always examine all the expenses to determine which are non-cash items, like depreciation, and business use of home offices and vehicles.
A professional Denver business broker can shed some light on these considerations before you commit buy the business. When in doubt - get professional assistance.
Keep in mind that financial records are only history. There is no way of knowing that what happened in the past will repeat for you. In the long run, the financial records are merely an indicator of what the business has done - it is up to you to run the business competently after purchase.
Seek business owners who are open to an “earn-out” for a portion of the business sale value. At Company Brokers we are effective at designing deals where the business owner will consider an earn-out for the more desirable buyers.
5. How to determine if the seller is reporting all income
You can't! And not reporting income is against the law. You should only count the revenue the seller can prove. We all know cash type businesses under-report income at tax time.
This "underground economy" is well-documented and accounts for billions of tax-free dollars. Many sellers will tell you about how they under-report, but that should raise a red flag - they have no way of proving their claims. To deter me if a business is the right one for you, you should make your decision based on the actual tax returns filed with the IRS
We typically create a comprehensive cash flow analysis of the “true” cash flow and income of the business so that the buyer can clearly see all real income or EBITDA. THE BOTTOM LINE to buy a businesscan be a positive prospect. If you buy a business, that independence can bring the best out in you.
There are no guarantees. At some point, even after all of your investigation is completed, you will still have to make that "leap of faith" that is necessary to proceed with the purchase. if you buy a business.
You will have to work hard, perhaps even "tighten your belt" a little and perform many different jobs to be successful in your own business.
But, if running your own company, making your own decisions, not having to worry about job security, and just being on your own are important - then buy a business and be in control of your own destiny.
Even in view of the risks that any business takes, the vast majority of independant business owners would never go back to a nine to five job.