Buying a Business Tips
RULES OF THE ROAD
We created this separate page on buying a business tips on California business broker .com to give buyers some insight intohow business's are bought and sold. Some of these items are very general tips and others are some guidelines that most professional business brokers feel strongly should be followed.
1. Most buyers never do anything. What we mean by this is that about 95 percent of buyers that most business brokers or business sellers come into contact with will never buy their business or any business. Because of this most business brokers will try to identify whether a buyer is serious or not very early in the process. Therefore buyers should be prepared to prove that they are serious to a small degree when they initially make contact with the business owner or broker.
2. A buyer should identify why the seller is selling very early in the process. It is important to know the motivation of the seller. Is this business being sold because of a retirement, because of other business interests or is the business losing money? The key is to identify how motivated the seller is and to flush out any potential issues early before investing a lot of time in this effort. The motivation of the seller will also speak to how flexible they will be with the price and the terms.
3. Beware of any business that is listed on CraigsList, in the newspaper or listed under the category of an asset sale. As you can imagine there are many business opportunities that are not worth your time or effort. If a business is represented by a professional business broker there is a fairly high chance that the business broker has already verified that the business is profitable and is a real bona fide business opportunity. Essentially a business broker will do a lot of the screening for you. There could be good business opportunities listed on CraigsList. However you will have to wade through a number of failed businesses or scams before you get to the real opportunity.
4. Always, always respect confidentiality. On of the most important buying a business tips has to do with confidentiality. When you receive information regarding a business that is for sale you are receiving a good deal of personal and sensitive information. The majority of the time employees, vendors and customers are not aware that a business may be for sale. Never approach the owner or employees and never visit the business location without an appointment.
5. Be prepared to sign a non-disclosure agreement. Many buyers are intimidated by signing a non-disclosure agreement. NDA forms have a good amount of legalese on them and buyers are worried that they are committing to something they don't want to commit to. This is not the purpose of a non-disclosure agreement.. The non-disclosure agreement is an agreement between the seller and the buyer that states that the buyer will only use the information they gather for purposes of evaluating whether or not they want to buy the business. The non-disclosure does not commit the buyer to any action. Many business brokers will not work with you if you refuse to sign a NDA.
6. Search by seller's discretionary earnings and not by asking price. Most of the business for sale web sites have a cash flow or discretionary earnings figure. Use that figure to search by and not by asking price. Many businesses are priced incorrectly. There's also a much bigger disparity between listing price and actual sales price in business sales than say real estate for example. Using the cash flow or discretionary earnings amount is a much more accurate way to determine the size of a business.
7. When you initially make contact with a business broker ask about that business' financial records, the quality of the records and what financial documents are available. Many businesses do not have good financial records. It is important that you, the buyer, know this early in the process so you can make an informed decision as to whether or not you wish to proceed. If the business does not have good financial records the discretionary earnings amount and asking price could be called into question. Ask the broker how they determined the asking price and how the discretionary earnings amount or cash flow amount was calculated.
8. Be prepared to devote a significant amount of time to this effort. There is a decent amount of work that is involved with buying a business. You'll need to be flexible with your time when setting up meetings with the owner and you'll need to devote some time to reviewing the financial records and business profiles that are provided to you by the selling broker.
9. Be prepared to move quickly. Profitable, well priced businesses come on the market and usually sell quickly. If you're serious about this venture and you identify a business that meets your criteria you will need to be prepared to make an offer on that business. A challenge of selling or buying businesses and is that businesses have a lot of variables and there's a lot of information to analyze.
10. Offers on Businesses are unique. Although it appears similar, making an offer on a business is very different than making an offer on real estate. Essentially the initial offer is to see if you and the seller are in the same ballpark. If not, then it is not worth it to go through due diligence. Buyers make an offer and then see if the seller can prove all income the business generates. If the business is making less then the buyer can walk away or you can re-negotiate.
Buyers should note that, usually no money changes hands until after due diligence.
11. Businesses are bought and sold in person. Business brokers will not believe a buyer is serious unless they are willing to meet face to face. You should meet with the owner and visit the facility early in the process. See the business in operation before you spend hours or days analyzing the financial statements.
12. Take Action. You can have all the buying a business tips in the world - but it is up to you to take the first step. Get out there and visit businesses. See them in person. You can never really get a sense of the opportunity that exists until you see a business in person.
Would you like to discuss more buying a business tips? If you are searching for a business to buy and are in the Southern California area - contact us. We will be happy to work with you to form an acquisition strategy.
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