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BizReport : Internet : March 13, 2019

5 Tips for Researching a Small Business for Sale

If you hope to own your own business someday (or soon!), you can take any of several paths. The first option is to start your own, of course. And though it may sound appealing, this route entails a variety of challenges you'll have to address. The second choice is to buy an existing business. But if you decide you're more interested in doing that, you'll have to be prepared for all this option entails.

How to Vet a Small Business for Purchase

Buying a company is a complex process that you should approach with care. Whether you're looking at a small company that's currently owned and operated by a single individual, or a large firm that has hundreds of employees, either poses unique challenges and friction points at every step.

If you don't bother to perform meticulous and thorough due diligence at the front end, you shouldn't be surprised if you find yourself on the raw end of a bad deal.

There are numerous ways to vet a small business, but certain approaches tend to be more fruitful than others. Here are five practical tips you can use to gain the upper hand in your search and negotiation process.

1. Work With a Business Broker

It's theoretically possible to purchase a business on your own, but it's much smarter to work with a broker who has the experience and resources to assist you in finding solid deals, and protect your interests throughout the process.

Brokers typically have an inventory of businesses for sale. Without revealing the name of the company, they will allow you to look through their listings and analyze metrics such as annual revenue, cash flow, listing prices, etc, fairly swiftly.

This will empower you to vet businesses thoroughly before you travel too far down a rabbit hole.

2. Find Out Why

It's wise to dig a little bit and find out why the business owner is considering the sale of his or her company. The answer the owner provides may give you insight into the state of the operation and its potential if you decide to take it forward.

When an owner wants to sell his business because he wishes to retire and move closer to his grandchildren, that's typically a good sign. A proprietor who seeks to sell the firm because he's had trouble making ends meet and wants to move to some other line of work is more likely to give you pause.

Small but vital pieces of information such as these can give you a better feel for what sort of deal you would be getting.

3. Calculate EBITDA

Dozens of metrics can be useful for evaluating the financial health and viability of a company, but the EBITDA formula is typically one of the most illuminating. EBITDA stands for "earnings before interest, taxes, depreciation, and amortization."

It's the measure of a company's ability to generate operating earnings -- that is to say, profit. "The multiples vary by industry and could be in the range of three to six times EBITDA for a small to medium sized business, depending on market conditions," explains.

"Many other factors can influence which multiple is used, including goodwill, intellectual property and the company's location."

4. Review History

A healthy EBITDA valuation with a buyer-friendly price isn't enough to pull the ripcord on a deal. Make sure you take the trouble to review the history of the business and find out as much as you can about its past.

"Thoroughly review copies of the business's certified financial records," Nolo advises, "including cash flow statements, balance sheets, accounts payable and receivable, employee files including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information."

5. Vet the Business Owner(s)

Along the same lines of the history review, you want to vet each of the business owners -- if there are more than one -- and find out more about them as people and as professionals in the industry. Aside from basic background checks and Google searches, try to speak with past colleagues, employees, professors, clients, and/or business partners.

If you sense any patterns of sketchy or salacious behavior, this could be a warning sign that less-than-obvious issues that are even worse, or possibly different, could be under the table.

Make an Educated Decision

One may consider both objective and subjective approaches to determine whether a business is worth buying or not. But armed with the right advisory and data, you should be able to uncover the objective metrics without too much difficulty.

In the end, your offer (or lack of one) will most likely depend on the subjective facets. But if you use the tips highlighted in this article and a pinch of common sense, you'll make an educated decision that puts you on the road to success for years to come.


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