Perhaps you have decided to become a business owner but starting up your own business is just too risky. One way to locate a business that is for sale is to go to the online business for sale marketplace. Two popular online business marketplaces are BizBuySell and BizQuest. Another option includes finding a local business or franchise broker by checking the classifies for business opportunities or businesses for sale. Another way that most people often don’t think about is to simply approach a business you would consider owning and ask the owner if he has ever considered selling. Even if he is not willing to sell, he may be able to refer you to someone else who is.
When you find a prospective small business with under one million dollars in revenue, remember that in all likelihood the business was run in a taxed advantaged way for the benefit of the owner. If this is the case, put more stock on the revenue than the reported taxable income initially. Regardless of the business’s size, consider next what you would do differently from the current owner. A simple rule of thumb is to base one half of the decision on what the seller did and the other half of what you would do differently. Whenever you consider buying another person’s business, you should always develop your own preliminary business plan to see what you might do differently.
Some minor improvement that can pay large dividends to the buyer is as simple as staying open longer, changing prices, motivating employees, marketing more, adding a drive-through, building a better marketing process or website, and adding pickup and delivery services. Using the Business Model Canvas at this point can be an eye-opening experience. A key point here is you pay the seller on his past performance, but value the business on potential future earnings. When it comes to trying to determine the income potential, you will have to account for any debt service related to the purchase. Additionally, the seller generally takes the cash in the business and well as gets paid for the accounts receivable up to the sale date at the closing. You, as the new owner, have to inject a sufficient amount of cash into the business to cover the operating expenses until your own receivables kick in.
When it comes to lifestyle or micro businesses, remember that the financial reports alone may not paint an accurate picture of the owner’s true compensation. Small business owners often use business assets for personal use. For example, a farmer may slaughter a cow for personal consumption that never shows up on the books or a fleet vehicle may be used to benefit the owner and not be accounted for on the books.
Are you ready to buy a business?
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