Whether you're thinking of buying a $100,000 tutoring company or an $11 million dollar trucking company, you’ll want to do some serious homework.

Here are a few key factors to look into before you sign on the dotted line and close the deal:

Whether you're thinking of buying a $100,000 tutoring company or an $11 million dollar trucking company, you’ll want to do some serious homework.

Here are a few key factors to look into before you sign on the dotted line and close the deal:

 ==> Compare Prices

Businesses can be valued many different ways.  Although there are industry standard methods utilized most often, other methods can be used from time to time.  Some businesses are valued based on a multiple of cash flow, others based on the value of assets, others based on the company's growth potential, and still others based on different criteria. The value of a  TV station versus an e-commerce company versus a restaurant can be arrived utilizing this variety of methods.

Look at other sales in your industry to see what comparable companies are selling for. Figure out how companies in your industry are valued and see if that matches the asking price of the company you're considering.

==> Tax Returns

Request tax returns from the company. Never assume income is higher than reported on their taxes.

Beware of a business owner that says, "Even though our returns say we only made $90,000 last year, we actually made $150,000."

It's extremely risky to pay for a business based solely on the business owner’s word. Only pay for revenue and value that can be proven by IRS statements or third-party audited financial statements.
 

==> Investigate Traffic and Sales Yourself

Look beyond the owner's records and books. If a restaurant owner says they average $3,000 a day in revenue, then stake out the restaurant for a few days to monitor the traffic. What’s the headcount for the number of people coming in and out. Then multiply that number by the average order size to see if the numbers make sense. Just remember, you are bound by the confidentiality agreement you signed when you inquired on the business, and it is your responsibility not to disrupt the business in any way as you investigate.  Employees and customers do not know the business is for sale, and as the potential future owner, you do not want to upset the business.

You can do the same thing, even if you are buying a web –based business: request to add your own traffic counter to their site for two weeks to confirm their original numbers.

Bottom line - no matter what kind of business you're considering buying, confirm the numbers yourself.
 

==> Company Reputation

Most business owners obviously want to present their business in the best light possible. It's your job to dig up additional history on the company before you make an offer.

Start with searching for their name with Google and see what comes up. Then search for their name along with words like "BBB," "customer review" and so on.

Check out online review sites like Yelp to see what people are saying about this business. Have they ever had complaints? Were they ever substantiated? And most importantly how did the company respond to the issues.

Also look at the fundamentals of the company. This is when industry knowledge really comes in handy. For example, an experienced laundromat owner will be able to evaluate the likelihood of future repair costs. Or an experienced restaurant owner will be able to determine the safety and value of kitchen equipment or inventory.

 

==> Finance Terms and Options

Finally, discuss financing terms with the seller. Many sellers are willing to finance part of the sale or enter into an earn-out agreement where part of the sale is tied to the future expected revenue of the business. Always ask, so that you know your options and where you may be able to negotiate.

These are a few of the most important things to look into and ask about when you're considering buying a business. While it may require an investment of time and money to thoroughly research an opportunity, it really pays to do your due diligence. Many potential buyers with limited time and research skills turn to brokerage firms like Calhoun Companies to investigate businesses on the market.  Our goal is to present information in a thorough and effective manner, and to develop a win/win situation for the business Buyer and Seller. 

Photo Credit: Rido

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