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Try to put
yourself in the place of a prospective purchaser of the business. What
would you do to make it more attractive or more saleable?
Financial records of your business
are critical to the sale of your business, but how it looks is also
important. First impressions really count! If a potential buyer doesn't
like the appearance of your business, the rest of it may never get a
is not really how much your business will sell for, but how much of it
can you keep?. The Federal Tax Laws do determine how much money you will
actually be able to put in the bank. How your business is legally formed
can be important in determining your tax status when selling your
business. For example: Is your business a corporation, partnership or
proprietorship? If you are incorporated, is the business a C corporation
or a sub-chapter S corporation? There are some new tax rules, effective
January 1, 2000, that impact certain businesses on seller financing. The
point of all of this is that before you consider price or even selling
your business, it is important that you discuss the tax implications of
a sale of your business with a tax advisor. You don't want to be in the
middle of a transaction with a solid buyer and discover that the tax
implications of the sale are going to net you much less than you had
operations manual. You may already have one, started one years ago, or
simply, have thought of doing one. Now is the time. It may actually
create added value to the business. Even if it doesn't, it will impress
buyers that you have your business "act" together and should help you
sell more quickly and effectively. Preparing a manual on how to operate
your business can also be helpful even if you don't want to sell. It
doesn't have to be elaborate, just cover the basics. A collection of ads
that you have placed a catalog or sample of products, publications, or
menus (if the business is food related) is also impressive. Include
anything to do with the business that might be helpful for a new owner.
However, don't include anything that is proprietary, such as customer
lists, suppliers or secret recipes, etc.
Are you planning
on having your own business? Buying your business can be a complicated
procedure. Throughout the buying process, it's important to keep an open
mind while searching for a business that will fit your needs, talents,
skills and lifestyle. A business broker has many different types of
businesses for you to consider; however, you need to remember that there
is no such thing as that "perfect" business. Another vital thing to keep
in mind is that at some point you must be able to make the "leap of
faith" that separates you from being a "looker" to a "doer." This isn't
easy, but it must happen if you are ever going to be in business for
Going into business for
yourself is a big step, one that can be full of apprehension and even
fear. Almost 90 percent of all those who purchase a small business have
never owned a business. Most of them bought a business that was
different than what they had been looking for. These buyers had the
opportunity to explore the marketplace and subsequently found a business
more to their liking. In most cases, the seller financed the sale.
As you begin your
search, keep in mind that running your own business is more than a job;
it is a lifestyle change. In most cases, it is a very big lifestyle
change. Usually, you will be working longer hours, making all of the
decisions, and, as the expression goes, "you will be the chief cook and
bottle washer." In other words, you will be doing all of the work from
running the business to, in many cases, sweeping the floor and changing
the light bulbs.
- Pride in the
service or the product
- Control of
your own destiny
- Customer and
What To Look For
1. How long the business has been in business.
A business with a long track record means there are good reasons to be
operating. It will be well known in the area, and people will be used to
patronizing the business or using its services. The longer it has been
in operation, generally, the better the business.
long the present owner has owned the business.
The longer the present owner has been in business, the more likely he or
she has been successful. People don't stay in business if they are not
3. Why the
present owner is selling.
If the owner has been in business for six months, is 37 years old, and
wants to retire, you should be suspicious. The more valid the reason for
sale, the more realistic the seller will be in considering your offer.
However, keep in mind that after five or six years or more, people do
get restless, "burn-out" sets in, and people look for new challenges.
Why the seller is selling is an important question - get the answer.
books and records are important.
The financial records are a good indication of how well the business has
been doing over the years. Keep in mind that tax records are not
designed to show the business in the best light: no one likes to pay
more taxes than they have to, and owners of businesses are no different.
Generally, tax returns are a worst case scenario. You need to be able to
look at the expenses and discover which ones are non-cash items, such as
depreciation, and business use of home and vehicles. How important was
the business trip to Las Vegas? A professional business broker can point
these items out to you. When in doubt, however, seek outside assistance.
Keep in mind that
financial records are only history. There are no guarantees that they
will or can be duplicated or repeated. All of your profits are future.
In the final analysis, the financial records of the business are an
indicator of what the business has done; what you do with its future is
up to you.
5. How to
determine if the seller is reporting all income.
The simple answer is - that you can't! Not reporting income is against
the law. You should consider only the income that the seller can show
you. We all know, of course, especially in cash type businesses, that
there is the possibility that the seller is not reporting all of his or
her income for tax purposes. This "underground economy" has been
well-documented and is in the billions of dollars. Many sellers will
tell you about how much they are "skimming," but you should ignore their
statements, since they have no way of proving these amounts. In
determining whether a business is the right one for you, you should base
the decision on the figures actually supplied to you by the seller.
The Bottom Line
Being in business for yourself can be a daunting prospect. There are no
guarantees. At some point, after all of your investigation is completed,
you will still have to make that "leap of faith" that is necessary to
proceed with the purchase of the business. You will have to work hard,
perhaps even "tighten your belt" a little and perform many different
jobs to be successful in your own business. But, if running your own
show, making your own decisions, not having to worry about job security
(remember, no one can fire you from your own business), and just being
on your own are important - then owning a business is for you. After
taking this leap of faith, almost all business owners will tell you that
they would never go back to being an employee.
What should you look for
when considering a business to purchase?
Unfortunately, too many prospective buyers want to know the asking price
first and then ask how much money they can make. These are the wrong
questions to ask initially. You need to know how much cash the seller
requires as a down payment. No matter how good the numbers are there is
no point in looking at a business if the seller wants three times as
much cash as you are willing to invest. Remember, the actual amount of
money a business earns is usually much more than just the bottom line. A
smart approach is to get more information on the business, and even make
a visit, before ruling it out or getting too involved in the numbers.
It's all part of the learning process.