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    2 Replies Latest reply on Jul 13, 2009 3:34 PM by Adducent

    What is essential to look at when buying a business

    skysthelimit Newbie
      I am looking to buy a small 99 cents store or other similar. What are the key things to look for when analysing the financials?

      Also, can anyone help me with a simple business plans templet. Do they always have to be so complicated?
        • Re: What is essential to look at when buying a business
          DomainDiva Ranger
          Look at the books. Hire a forensic accountant if you need to. Do not skimp on accounting or legal advice.

          Yes business plans have to be as complicated as they are. It seems like the business owner is answering the same question 50 ways, but that's what happens when you run a business.

          FYI, putting together the financial projections means that you are showing an investor that you understand the business model not what the actual numbers are going to be.
          • Re: What is essential to look at when buying a business

            There are a lot of important things to cover when buying a business. So it is not practical to put them all here. But I will list here some of the high points that you should look at:

            • What is the reason for the sale? Is the owner selling because he "wants" to do something else or that he "needs" to because they see the business not doing as well in the future as it has in the past. The real reason for selling is very important to determine early on as best you can.
            • With this type of business I'm sure that location is important. Is the traffic (I'm talking flow of people/customers/prospects etc.) volume in the area steady, going up, declining? Is the area growing, flat or declining? Does the city have any planned construction over the next 3 to 5 years that will disrupt access to the business? I have seen location sensitive businesses go out of business because of highway construction disrupting the traffic (of cars and people) in the business area.
            • What is the revenue and net income of the business for the past 3 to 5 years? Check their financials for at least the last 3 years and see how sales and profits are trending. Are they going up, flat or declining?
            • What do they forecast for the next 3 to 5 years? And are the projections realistic.
            • How strong is the balance sheet ... i.e. are there assets with value and is the business carrying debt? If there is any debt, can it be assumed?
            • Do they have appraisals to prove any value they are putting on any of the assets?
            • Business values (i.e. their asking price or the selling price) are largely determined by the net income or EBITDA of the business (sometimes with owners benefits and compensation added back in) at a fair-market multiple on those earnings often plus the value of tangible assets. Do you know what they are basing their asking price on? Is that a realistic, fair and acceptable price? Again, keep in mind what the picture for the business looks like in the future. New business buyers often make the mistake of paying for past performance but end up with a business headed down. Check things out closely.
            • Will the owner carry back any financing? If he needs to sell the business quick, see if he will carry a good part of the purchase price on a note paid from the business earnings.


            To recap for you: With any business acquisition it important to establish the stability of the revenue (over the past 3 to 5 years and going forward for the next 3 to 5 years). Another thing to look at would be operating expenses. Are there any opportunities to reduce expenses and what is the outlook if you will face higher operating expenses than the current owners? And the question about the growth of the area, traffic flow, location and any planned highway construction is important to look at as well.


            There are many more questions but the above will be critical when it comes to initially checking out the business as part of your due diligence. Buying a business means a lot of work and it can be frustrating to try and get all the pieces and funding lined up; but if the dream of owning your own business is important to you ... you can work at it to make it happen.

            I hope the above helps you or gives you some direction. One of my books is on the subject of buying businesses; I can pull from that book the section on Financial Due Diligence questions and I don't mind to send that to you to help you out. If you want me to send that to you, you can look at my profile here on this site, go to my website and contact me directly to request it. In your email, put "Financial Due Diligence section from your book" and by reply email I'll send it to you.

            Dennis Lowery
            Adducent, Inc.