Some enterprising individuals are put off by the thought of buying an existing business for sale, as they see it as a veritable leap into the dark. The entire concept can be very alien if you’ve never been involved in these types of transaction before. After all, it is not like buying a more tangible product like a vehicle or a house, where in many respects “what you see is what you get.” To value a business correctly, you need to look at a number of different intangibles as well as assets that need to be inspected and you also need to consider goodwill in many situations. In a service related business, goodwill and a maintainable client list can be critical elements, but the process of due diligence involves the revelation and exploration of numerous areas and documents.
It’s important to remember that there are two distinct and different viewpoints. The seller will have a clear indication of the worth that he or she places on the business. This may often be inflated by a natural enthusiasm and the sheer amount of hard work and dedication that may have been put into the business to this point. Never disrespect the sellers’ point of view of course, but look at the documentation and evidence that you will find in the cold light of day and remember that it is entirely up to you to determine if you’re going to get involved and buy business interests in this way, according to your value parameters.
When you decide that you want to move forward and investigate whether to buy a business of interest, understand that this may be a lengthy process. At this time, you had better have a good level of common sense and humor and be ready to communicate at length with the seller.
This is where expert advisers will come into their own and if you have no real experience with this kind of business, its related market or niche, utilize proven resources and get as much help as you can. This is not to say that you will simply hand off all the work to these advisers, barely looking at the documentation presented to you, as the decision-making must in the end be made by you and you alone. The financial documents and all of the paperwork must be reviewed by you first to be sure that you have a great feeling initially before you hand them over for further processing by your experts.
A red flag will be raised if some of the financial documents are incomplete, information is missing, or they are poorly balanced or even not reconciled. Accounting traditions and precedents must be maintained at all times. Don’t be surprised if the seller will ask you to sign a non-compete and/or non-disclosure document before any financials are made available to you, because these financials are nevertheless the rock upon which the entire business is set.
Each and every operation is different in its own right and no two businesses are the same. So many external influences are involved and any number of different events can come to bear to create a variety of different situations. Expect to uncover some unusual facts and figures or surprises and remember that, while industry benchmarks are interesting, a lot of the information you discover here will be a function of real-world activities.
Richard Parker is the President and founder of the prestigious Diomo Corporation – The Business Buyer Resource Center. His celebrated materials, seminars and consulting have encouraged thousands of aspiring business buyers from around the World to pursue their dream to buy a business.