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Benchmarks For Buying A Business For Sale

By Richard K Parker

Republish: EasyPublish™ Published: 10Mar2010 Word count: 570 Viewed: 93 time(s) Get Free Content For Your Site

Buying a business for sale is a multistep process and each step is important. Many times you may not proceed to the next position until you complete the preceding step and you should never be tempted to shortcut the process at all. Adequate preparation and time spent revealing everything there is to know about the business will be well spent here and will help to ensure that no horror stories are uncovered once you take the helm.

A lot of information can be revealed before you even talk to a prospective seller. One of the most important questions you must ask yourself before you go forward is what kind of enthusiasm you possess for the type of business you have your eye on. Do you really want to be involved in that industry and does it represent an area that you truly want to be engrossed in? Unless you intend to be a completely "hands-off" owner and are therefore taking considerable additional steps to ensure your safety, it is far better for you to be involved in an industry that you have a good feeling for, if not a considerable level of enthusiasm.

When you are conducting your due diligence, make sure that you inspect all documentation:

* Financials: including profit and loss statements, balance sheets, reconciliation documents, payroll records, tax reports. If the seller claims a considerable amount of "cash sales" but cannot point to these within tax declarations, then they cannot be counted and you must ignore them.

* Employee records: including longevity, pay scales, behavior, and attendance.

* Licenses: including federal, state, city, county as appropriate, plus any certification licenses you must possess to operate the business. Be prepared to consult records independently to see if there have been any discrepancies or problems in the past.

* Equipment records: including age, depreciation, maintenance, replacement cost, any required inspections.

* Inventory records: including turnover, condition, re-saleability.

* Supplier contracts: including portability, alternatives and goodwill.

* Property records: including rental agreements and portability - the latter element is of considerable importance.

If you find that all records, licenses, contracts and agreements are in order and are workable for you going forward, you may be wondering how to arrive at a good value when you buy business assets. There are many different ways of looking at this. Some of the methods used to calculate include:

* Asset-based multipliers, where a total value of the assets are used to determine a value.

* Rule of thumb, where industry benchmarks are used to establish the value(not recommended).

* Revenue-based multipliers, where a percentage or a multiple of the monthly or annual revenue is used. Again not recommended.

* Cash flow multiplier, where a business owner's profit level is added to his or her salary and any other perks and certain expenses are deducted. This is most often the most appropriate way of valuing the business for sale.

While there are many documents and figures that can be proven to backup an owner's claim, or not as the case may be, you need to take into account significant facts. What is the age and reputation of the business, the level of competition expected, its physical location in many cases, the legal structure of the business, the quality of the premises and/or the difficulty in obtaining a new lease. When it comes to a business for sale, all will help you to determine whether you should buy a business like this, or not.

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