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Should you buy a business?

Are you an entrepreneur who wants to own a small business?  What’s the best way to go?  Do you want to start from scratch or purchase an established successful business?  Smart entrepreneurs who want to start their own business will carefully analyze the best way to get their business started.  Sometimes an original idea will take spark and the entrepreneur will see it to full fruition.  However, the best and most economical way to own a business is to buy it.

But how do you evaluate whether a business buying opportunity is a good one?  There are many factors to analyze when you are considering a purchase of a business.  Here are some important factors that can help identify whether to purchase an opportunity is the best choice.

Does the business meet your business objectives? 

A potential target business opportunity should already be established in the area that you as an entrepreneur want and desire to work and grow.  Talk to the seller or sellers.  Find out what they enjoy about their business.  What are the headaches?  Ask permission to sit in and observe the business processes for a day or two.  Talk with employees, if any.  Find out if this type of business fit your profile, and what adjustments you could make to improve it?  If you find it is a business to consider and a good opportunity, then move forward with your analysis.

Review the location and employees

Does the business rent an office or retail space?  Ask to see a copy of the lease.  Take a close look at whether the facility is in the best location.  Perhaps the first objective in improving a business is to relocate to a better location that offers better and more space, better customer base, and better lease terms.

Does the business already have experienced employees?  Are they willing to stay?  Sometimes, having seasoned veterans can be a great asset to help you run a business.  On the other hand, after meeting with them, you may determine that new faces are required for your new business.

Analyze assets and finances

Evaluate the list of assets that a company is putting up for sale with the business.  All capital equipment, furniture, and any real estate should be analyzed to determine the market value, and whether any replacements are necessary.

Taking a look at the business’ finances is probably the most important step to take.  Once you have made a determination that the business meets your target objectives, ask to see all income statements, balance sheets, and cash flow statements for the past two years. In addition, ask for all current accounts receivable and payable.  Meet with a Certified Public Accountant (CPA) to get a closer evaluation of the business finances.  This evaluation can determine whether profitability has improved and if current liabilities, accounts payable and receivable ratios are within acceptable limits.  Also, talk to your CPA about the tax implications of purchasing the business.

Determine a fair purchase price

With the help of an appraiser or a CPA, you can determine whether the listed sales price offered by the current owner is fair.  Evaluate from different objective angles that show potential Return on Investment (ROI).  Include an asset appraisal approach and a future earnings capitalization option.  Determine which one is the best appraisal method for the business and negotiate with the seller to arrive at an agreeable price.

Starting or buying a business can be hard work and time consuming.  However, with the right strategy of evaluation, buying an established business may be the best route to owning and managing your own empire.