When Buying a Business, Consider These Benchmarks

Buying a business for sale is a multistep process and each step is important. Many times you may not proceed to the next position until you complete the preceding step and you should never be tempted to shortcut the process at all. Adequate preparation and time spent revealing everything there is to know about the business will be well spent here and will help to ensure that no horror stories are uncovered once you take the helm.

A lot of information can be revealed before you even talk to a prospective seller. One of the most important questions you must ask yourself before you go forward is what kind of enthusiasm you possess for the type of business you have your eye on. Do you really want to be involved in that industry and does it represent an area that you truly want to be engrossed in? Unless you intend to be a completely "hands-off" owner and are therefore taking considerable additional steps to ensure your safety, it is far better for you to be involved in an industry that you have a good feeling for, if not a considerable level of enthusiasm.

When you are conducting your due diligence, make sure that you inspect all documentation:

* Financials: look at balance sheets, reconciliations, profit and loss statements, tax filings and payroll records. Remember that "cash sales" cannot be included within calculations unless they are actually referred to within tax documents. Otherwise you must ignore them.

* Employee records: look for information on individual attendance, the pay scales, length of service and employee behavior.

* Licenses: these must all be in place, including county, city, state and federal. Where certification licenses are required, inspect these closely. Also, you should be prepared to look at results with a keen eye to see whether any problems have arisen in the past.

* Equipment records: including age, depreciation, maintenance, replacement cost, any required inspections.

* Inventory records: including turnover, condition, re-saleability.

* Supplier contracts: including portability, alternatives and goodwill.

* Property records: including rental agreements and portability - the latter element is of considerable importance.

If you find that all records, licenses, contracts and agreements are in order and are workable for you going forward, you may be wondering how to arrive at a good value when you buy business assets. There are many different ways of looking at this. Some of the methods used to calculate include:

* Asset-based multipliers, where a total value of the assets are used to determine a value.

* Rule of thumb, where industry benchmarks are used to establish the value(not recommended).

* Revenue-based multipliers, where a percentage or a multiple of the monthly or annual revenue is used. Again not recommended.

* Cash flow multiplier, where a business owner's profit level is added to his or her salary and any other perks and certain expenses are deducted. This is most often the most appropriate way of valuing the business for sale.

While there are many documents and figures that can be proven to backup an owner's claim, or not as the case may be, you need to take into account significant facts. What is the age and reputation of the business, the level of competition expected, its physical location in many cases, the legal structure of the business, the quality of the premises and/or the difficulty in obtaining a new lease. When it comes to a business for sale, all will help you to determine whether you should buy a business like this, or not.