Buying an established business is attractive for a number of reasons:
- If things are done correctly by the selling party, you’ll take ownership of a ready-made entity, with processes, workflows, suppliers, and customers already in place. In theory, the kinks have been worked out, and you can pick up from where they left off.
- You’ll inherit a brand with goodwill attached. You don’t need to spend time and money trying to build its reputation from scratch.
- And if you already own a competing business, it often makes sense to absorb your competition rather than challenge them in a new marketplace.
So, aside from the legal requirements that accompany the purchase of a business, what else is there to consider? Well, one thing many people overlook when buying a business is that they’ll often have to deal with a business broker.
What is a Business Broker?
A business broker is essentially a salesperson, and this means they have their own interests - namely, to achieve the sale and earn commission. Some (though not all) can be quite pushy and not always ready to provide you with all the information you require. In other words, they often prefer to show you the highlights rather than the true financial situation, warts and all.
Typically business brokers try to value the business based on its revenue, as this results in the highest sale value, and a bigger commission check for them when the sale is complete.
While revenue is somewhat relevant, you should always focus on profits. Revenue isn’t a true reflection of the worth of a business, profit is. For instance, large profits may suggest there’s potential for growth and development, while small (or no) profits could indicate that overhead is high, or the market is saturated.
Another thing some business brokers like to do is tell you some variation of “this business needs an owner than can be hands on and can take it to the next level.” Now, if it were that easy, don’t you think the current owner would have done it? You need to get to the heart of the reason for the sale; push for more information and take statements like that at face value.
And you should ignore any future projections that the broker might make. It’s pure guesswork. Instead, start by looking at the last 3 years to analyze trends and understand the direction of the business.
Our Advice to You
Accurate and up-to-date information is key when buying a business. If you’re dealing with a business broker, we advise that you request a copy of the business’s tax returns. This is a better and more accurate take on the financial performance of the company when compared with any internal bookkeeping (although review both if you can).
And if possible, request a copy of any QuickBooks files to review cash flow, billing cycles, and other important financial data. If at any point you’re denied access to this information, you need to ask yourself why? What’s more, you need to know who prepared these records. Was it the business owner, or a qualified accountant?
When purchasing a business, it pays to be skeptical. Make sure you review all available information, and question everything.
We Can Make Sense of the Numbers
Here at Nimbus, we can make sense of the financial information you’re provided.
We know what to look for, we can help you avoid errors and obvious pitfalls, and we can even help negotiate with the other party if required.
If you’d like to find out more about our services, get in touch today.