Crucial Points On Benchmarks When Buying A Business For Sale

Don't have any confusion about it, buying a business for sale is a multi-step process with each step being essential. You should never think about proceeding to the next position until the preceding step is complete and whatever you do, don't be tempted to short-cut ever. You can view any time spent in preparation and in the revelation of facts and figures about the business to be well spent and as such you will be ensuring that no horror stories come back to haunt you when you take over.

Before you even start to talk to a prospective seller, a great deal of information can be revealed. 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? Be advised, that unless you want to be a completely “absentee” owner and are considering the many additional steps that you need to take if this is the case, you should be enthusiastic about the business that you are getting involved in.

A process of due diligence requires you to inspect all kinds of documentation:

* Financials: including profit and loss statements, balance sheets, reconciliation documents, payroll records, tax reports. If the seller claims a considerable amount of “cash sales” but cannot point to these within tax declarations, then they cannot be counted and you must ignore them.

* Employee records: including information on individual behavior, attendance, length of service and pay scales.

* Licenses: including federal, state, city, county as appropriate, plus any certification licenses you must possess to operate the business. It would be in your best interests to look at records independently, certainly if you believe there may have been any problems in the past or possible discrepancies.

* Equipment records: detailing the age, cost of replacement, any required inspections and associated results and details on maintenance investments.

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

* Supplier contracts: are they transferable, do you have alternatives and is there goodwill?

* Property records: are any rental agreements transferable to you without any problem, as this can be particularly important.

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 assets are totalled and value is determined.

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

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

* Cash flow multiplier, is where a business owner's profit level is added to his or her salary and any other perks and certain expenses are deducted. This method is most commonly used to determine the value of a business.

Any number of documents and figures can be used by the owner to back up a claim and it is up to you to take these at their value and determine the appropriate conclusions. You need to look at the reputation and age of the business, what level of competition you may expect, the existing legal structure, quality and physical location of the premises and last but by no means least, 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.

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.