- Why is it being sold?– A friend of mine is retiring so its a legitimate exit strategy but he is 66 and others I know are in their 30’s and 40’s. Why are they selling? Is it because the money is not there, is it poorly managed, a bad mix of product and owner, a bad product or worse?
- Legal Considerations â€“ Are there existing contracts or encumbrances owing on the business? Is there a lot of debt outstanding? A friend was all ready to buy a great business on paper until I told him about a silent shareholder who had criminal history and certainly brought bad karma to the deal. The $5 million deal stalled soon after my conversation.
- Is it financially sound? – Have you seen the books, the real ones? Has the owner taken a salary or had the company pay all his expenses? Are there strange entries in the books given to you? I had a friend who paid his 2 year old son to valet park cars for his butcher shop, looked great on his tax return. I’ve also seen clients with 2 sets of ‘books’ hundreds of thousands apart in numbers.
- Market Value â€“ Many consider the value of a business at 2-3 times net profit. I have a client who sees a very, very liberal $50k in net but is trying to sell his business for $600K. He is listing it at what he thinks it is valued without considering a realistic price. It’s only worth $200k.
- Is it Right for You?– I have another client considering buying a bakery/cafe in a remote part of the country, not knowing the market, the area or the product. Would it not be more prudent to buy a business you enjoy, have knowledge of, have a passion for or use the product?
- Assets â€“ Are those assets listed in the books old and need replacement? Are the assets enough to manage growth or will you need to upgrade or add to existing assets to increase sales?
- Leases â€“ I have a client who wanted to purchase a very exciting coffee shop well established in a good location in New York City. The price is right but the lease upon scrutiny shows only a few months left on the lease. The owner assured him the owner will renew for 5 years plus 5 extension. What he didn’t say was that Starbucks was eyeing the property and was willing to up the rent by 20% to get the lease. Ouch!
- Balance Sheet– Goes hand in hand with number 3 above. You can see the chart of accounts of a business, see theuir journals and spreadsheets but have you seen the profit/loss sheets? Make sure you see all the documents even moreso if you have fallen in love with the property.
Without all your ducks in the row, any one of these eight points can mess you up and cost you a bundle. Better be prepared than sorry! More on this read here