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HOW TO BUY A BUSINESS
Do you dream of owning your own business?
While there may be no perfect business, our job to is to help you find one that fits your needs, talents, skills, and lifestyle. Below you will find information, that can help you determine whether buying a business is right for you. But there is one inconvertible necessity that buyers demand: Income sufficient to meet their needs.
what buyers want to feel
Nearly 90 percent of all buyers have never owned a business. To help counterbalance their fear, uncertainty, and doubt, most buyers want to feel:
- Pride in the service or the product
- They have flexibility
- They’re in control of their own destiny
- A connection with their customers and employees
Successful business owners work hard, tighten their belts, and perform many different jobs. But, if you like the feeling of running your own show, making your own decisions, not having to worry about job security (remember, no one can fire you from your own business), and just being on your own – then owning a business may be for you.
What should you look for?
- How long has the company been in business?
A business with a long track record means their have customers, who have bought, are buying, and might reasonably be expected to continue to buy from them. People patronize the business. Generally speaking, the longer it has been in operation, the more secure the business.
- How long has the seller owned the business?
The longer the owner has been in business, the more likely they have achieved success. People don’t stay in business if they’re not making money.
- Why is the owner selling?
If the owner has been in business for six months, is 37 years old, and wants to retire, you might be suspicious. And you might expect an owner with a valid reason for selling, will be more rational in their negotiation. But keep in mind that after five or six years, people may get restless. Burn-out sets in, and people may look for new challenges.
- How well have books and records been maintained?
The financial records are a good indication of how well run the business has been over the years. Keep in mind that tax records are not designed to show the business in the best light: no one likes to pay more taxes than they have to. Generally, tax returns are a worst case scenario. You need to be able to look at the expenses and discover which ones are non-cash items, such as depreciation and business use of home and vehicles. How important was that business trip to Las Vegas?Financial records do not guarantee that results will continue. All of your profits are in the future. What you will make of that future is up to you.
- How much of all income does the seller report?
It’s hard to tell. Not reporting income is against the law. So you should consider only the income the seller can verify and you can validate. In cash-heavy businesses, such as laundromats, convenience stores, liquor stores, and car washes, sellers may not report all of their income. This underground economy has been well-documented – it’s worth billions of dollars. Many sellers will tell you about how much they skim, but you can ignore any statements that they cannot prove. In determining whether a business is the right one for you, base your decision on the hard data the seller can actually show you.
What should you look for when considering a business to purchase?
Get the facts
Obtain preliminary information on price, terms, income, cash flow, and general location. Determine the amount of cash necessary to buy the business. Is it more than you are willing or able to invest? If yes, this may not be the business for you.
Next, determine if the business has to be able to meet your financial needs. You may expect to improve the productivity of the business, but you also face the reality that you have to meet your living expenses, as well as meet the new debt service of the business.
In many cases the purchase prices and terms are negotiable. In fact, businesses generally sell for about 15% to 25% less than the original asking price. There is an old adage that says, ‘The more cash you are willing to invest in a business purchase, the lower the full price; the less cash you are able to invest, the higher the full price.’
Visit the business
Visit the business to see if you like the location and the looks of the place itself – both inside and outside. This is a visual inspection. Pretend you are a customer. It’s not time yet to talk to the owner. If the business is the type that does not lend itself to a visit, make an appointment with the seller to inspect the business, or have the seller’s representative schedule a visit. If you like the physical location and appearance, proceed to the next step. If not, this may not be the business for you.
You will want answers to questions, such as: What is the rent? How long is the lease? What have been the sales for the past few years? Can the seller support the figures you have been told? You should be able to find answers to these and other questions from the Business Profile provided to you by the business broker. But now is not the time to have the seller’s books and records completely checked. There will be plenty of time to do that and review other important issues during the due diligence phase. This is the time to get those questions answered that have a bearing on whether you may want to own and operate this particular business. It is also the time to visit with the seller to get your questions answered about the business itself.
Make an offer
Before you employ outside advisors and go through the time and expense of due diligence make an offer to determine if you can come to financial terms with the seller.
Perform due diligence
At this point, you hopefully have arrived at a meeting of minds with the seller, and you are ready to begin removing the contingencies by performing what is commonly called due diligence.
are you ready to buy a business?
The next step to buying your own business is to make sure it is the right move for you and your family. Here are some questions that you may want to ask yourself before taking the next step.
How long have I been thinking about buying a business?
Many people want to buy their own business, but may want to make the commitment necessary to make it happen. This is in some ways similar to a car enthusiast longing for that perfect ride, but never spending the money necessary to get behind the wheel. Veteran business brokers have observed that the longer you look, the less likely you are to buy.
What is my time frame to find a business?
Regardless of when you want to make the purchase, now is a good to start educating yourself. The businesses-for-sale media site BizBuySell is a good place to start. Browse through the listings, read their articles, and start to familiarize yourself with the language and customs associated with buying a business.
Why do I want to buy a business?
If you are not motivated to buy a business, you won’t. If you’re tired of the corporate world, just have a job-job, or perhaps even a dead-end job, then business ownership may be right for you. Certainly if you’re unemployed or being transferred to a place where you don’t want to go – buying your own business can be a viable alternative.
Am I willing to invest most of my liquid assets in a business?
Buying your own business demands a serious financial investment. If you want to avoid risk, you might want to rethink owning your own business. It is not for the faint of heart.
Am I independent enough to live with my own decisions?
As a new business owner, you drive the bus. Right or wrong, you make the decisions. And, since you’re human, it’s likely you’ll make some wrong ones along the way. The question is, can you recover and keep going forward? If the fear of making mistakes or unwise decisions keeps you awake at night, owning your own business may not be for you.
Does my family support my plan to own my own business?
If your family, especially your spouse, is not behind you 100%, then you should think twice about business ownership. It’s especially important that you have the support of your spouse. They have to understand that running a business is time-consuming. At the same time, many businesses do afford the owner some flexibility, so you can attend the afternoon little league game.
Am I open-minded about different opportunities, or am I looking for a specific type or business?
It’s best if you are open-minded, especially if you are a first-time buyer. There are many types of businesses available, and you don’t want to limit your choices. Look for a business you can afford, that will provide the income you need, that has verifiable financial proof of performance, and most importantly, that you can see yourself running.
Have I set reasonable expectations?
Do you think that you can buy a profitable business with substantial cash flow for $10,000? Some sellers may be willing to assist in financing the sale of their business, but they’re not going to give it away. They have spent years building their business, and it may represent the biggest financial asset they have. They’re not going to just hand it over to you for a song.
Can I make the leap of faith necessary to buy a business?
Many prospective business owners do their homework, do everything necessary to begin the purchase process, and then back out of the transaction. They lack the conviction to close the deal. There is nothing wrong with this; not everyone should buy and own their own business. However, if you don’t think you can part with your money and take over operating the business on your own, you may want to think twice about business ownership.
Can I get a guarantee?
If you are looking for a sure thing, then business ownership is not for you. You can and should look carefully at all of the financials, tax returns, and other productivity reports. As you do, think about how you can improve what you see. Historical performance matters, but it cannot guarantee the future of the business – you do.
How can buyers find financial help?
Small Business Loans & SBA Loans
affiliation with financial sources
Through our affiliation with Ironhorse financial services we can help provide business solutions to the aspiring business buyer. Ironhorse knows a good opportunity when they see one and they’ll do everything in their power to help buyers seize it. If you’re a buyer, who is facing challenging fiscal obstacles, they want to talk to you. Their small business loans flow through the pipeline fast and easy, so you can forget about finances and get back to what matters: performing the due diligence required to buy the business.
Details About Their Small Business Loans
Ironhorse offers two distinct SBA loan programs for qualifying businesses: 7(a) and 504. With our 7(a) program, almost any type of business is eligible for financing through the Small Business Administration guarantee. Eligibility is determined by SBA size criteria.
Their 504 loan program is also backed by the Small Business Administration. With this option buyers can obtain:
- Flexible terms
- Fixed or variable interest rates
- Structure options for large projects up to $12,000,000
- Mortgages with great rates and term options
- Equipment acquisitions up to 80% financing
- Real-estate acquisitions up to 90% financing.
Fast Tracking Your SBA Loan Requests
As a ‘Preferred Financial Services’ company, Ironhorse can fast track SBA loan requests to cut through the red tape of traditional lending channels to get you the funding your business needs quickly and efficiently. Our preferred financial services status also gives us the ability to get business buyers the most favorable terms and rates on SBA loans.