Buying a Small Business

Small businesses are for sale all around us.

The dry cleaning shop where the owner wants to retire, the local restaurateurs who are interested in buying a bigger place downtown or the mobile dog-cleaning service with a proprietor who’s tired of driving all over the city are just a few examples. But a number of factors should be considered after identifying a couple of new venture possibilities before taking the big leap. 



A "small business" is generally one that is privately owned and operated—that is, not a public company listed on any stock exchange with fewer than 100 employees. The U.S. government further defines an enterprise as a small business based on annual sales, but this will vary by category and only comes into play to qualify for small business set-asides when bidding on government jobs.

A would-be buyer of a small enterprise should know everything there is to know about the amount of money coming into the business, where it goes, and projections for future earnings.
• Enlist the services of an accountant or CPA to assist with these efforts.
• Review the company’s profit-and-loss and cash flow statements.
• Pay special attention to the company’s liabilities, since new owners usually acquire these along with the company’s assets.

A good due diligence package also includes the company’s income tax returns, legal filings, articles of incorporation, and information on past and pending lawsuits. 



Understand Why the Business is For Sale
Sellers have their own reasons for wanting to unload a business. Retirement is a popular choice, along with a desire to change fields, relocate or purchase a larger business. But the reason the seller tells the buyer may not be the truth. Careful investigation by the buyer will glean helpful insights and minimize reliance on the seller’s word.

The buyer should ask a few questions. Is there an ongoing problem between the owner and employees or is their relationship so tight that everyone plans to jump ship when the business is finally sold? Will the location deter patrons because it’s out of the way or attract a major competitor because it’s near heavy vehicular and pedestrian traffic?
• Hang around for a week and see if reality matches claims made by the seller.
• Chat with customers and find out what they like about the business and what they would like to see changed.
• And scope out the competition’s operation, comparing it to the business you’re thinking of buying. 


Knowing these things before you sign on the dotted line can prevent a prospective buyer from making a huge mistake.


Determine the Value of the Business and Line Up Financing
The seller will have placed a price on the business. The buyer is responsible for determining whether it’s a fair price, and should seek help from a local business broker, who handles valuation issues and analyses, which vary by the type of business and industry. Fast-growing companies will normally sell for a higher price, since the potential for greater future earnings is factored into the equation.

A banker or accountant can help a buyer figure out if the business is affordable, since they both have the ability to reconcile monthly net earnings against the cost of buying a small business.

Ask For the Seller’s Help
In most cases, the seller wants out at least as much as the buyer wants in. If the buyer expects to meet the asking price—or at least provide a reasonable negotiating position—it never hurts to ask the owner to provide some of the financing. The seller will likely offer better terms than a bank, including a lower interest rate and longer payback period, motivating the seller to invest in the buyer’s success. The owner may even agree to stay on for a while for a consultant’s fee to help facilitate a smooth transition and make sure the buyer knows how to run the business.