Thinking About Buying an Established Business? – Where Can You Go to Buy a Business?

Buying a business can be a little overwhelming. There are many places which list businesses for sale. The most obvious places to start are of course is locally, in Newspapers and trade magazines; talk to business brokers, and ask your accountant or business adviser if they know of any potential businesses on the market.

Also, research ‘businesses for sale’ using your web access. It is a good idea to list your requirements online and receive instant notification when something suitable comes on to the market.

If you are already in business and are looking at strategic acquisitions, you may find word of mouth a useful method – through customers, competitors and suppliers. Naturally this depends on the relationship you have with them.

Every once in a while you may come across a business you would just love to own that is not for sale and wonder how to approach the business owner.This type of sale happens more often than you would expect, but it must be done in the correct manner to ensure you buy at the right price.

1. Buying a Business – What type of business can you see yourself owning and working in?

If you are not sure and have not had a great amount of exposure to small business your first step is to find out more on the life of a small business owner, have a chat with some business owners and find out how their first few months were when they were new to the business. How has buying a business changed their lives and what advice could they provide. Was their motivation to work in the business or run it at arms length?

Straight talk – unless you are looking at buying the business do not ever ask them personal questions such as how much the business turns over or anything regarding their financials as that is like someone asking you how much you get paid. Do not be hesitant to approach a business owner; you will be surprised just how much assistance business owners are willing to give you if you are genuine and transparent about it. It is a good idea to be prepared and have a couple of questions ready ahead of time, by being tactful and considerate you will get some great insights on operating a business from successful business owners!

2. Buying a Business – Are you a first time business buyer?

It is very normal for first time business buyers to start feeling overwhelmed and a little hesitant about buying a business, if this is the case you might be more comfortable taking a look at a franchise. Many first time business buyers feel that buying a franchise reduces the risk and provides them with additional and ongoing support from the franchisor.

3. Buying a Business – Discover hundreds of different types of businesses for sale

Business buying and selling websites are popping up all over the place which is great for you. There are many sites to look at, here is a few tips to help you research: – Use a search engine like Google and make sure you are ‘Googling’ in the Google site associated with the country you are looking to buy a business. e.g. http://www.google.com.au (Australia). This will show your local country pages first, making it easier to get to where you want fast.

- If you do not know what type of business you would like to buy, simply search for businesses for sale in the geographical area of choice.
- If you have a clear idea on the type of business you would like to buy then simply type the exact business for sale and geographical area.
- Make sure you do not miss the Businesses for Sale By Owner sites – Google shows a healthy list of them, our research indicates that over 30% of the businesses offered for sale are for sale by the owner (you may see the abbreviation FSBO or DIY ) so Google the abbreviation. Many smart business owners are now acquiring all the skills and information they need to successfully sell their own business without a business broker. This could be a huge benefit to you as the business buyer.

Buying a business successfully is really quite simple when you have all the information and a helping hand to guide you through the process without making avoidable mistakes. It is important to ensure you have as much information as possible because, in most cases, the business broker is working for the seller/owner. You can be one step ahead at all time armed with all the information and a business valuation tool will put you in the very best possible buying position for a win/win outcome.

For more information regarding Buying a Small Business, a recommended resource for expert, user-friendly, step by step Business Buying Information and Small Business Valuation Software Tool.

Signup for a free ‘Insiders Tips for Buying a Business’ when you visit the BizBuy Kit for business buyers. The Bizbuy kit is low cost and covers a myriad of tips, techniques and strategies – a vital resource. Plus, there is a comprehensive Small Business Valuation Software Tool enabling the buyer to expertly appraise a business multiple times.

Value a Business – Why Earnings Should Be the Basis of the Valuation

The purpose of this article is to propose a radical idea about small business valuation.

And that idea is: Small Business Valuation Is Not As Hard As Everyone Makes It Sound.

At least not when it comes to smaller (under $1 million in sales) businesses that are owner-managed.

What makes business valuation seem so complicated is that there is no universally accepted formula for determining value.

It has often been said that business valuation is an art not a science. Well, it might be easier if it was a science, at lest with science there are laws that can be proven to be correct.

For example, Einstein’s Theory of relativity, (E=mc2) provides a framework for understanding an extremely complicated subject with one short equation. And every scientist in that field agrees it is true.

And if you read some of the stuff on the Internet by the so called valuation “Experts”, you will think that you have to be Einstein to value a business correctly:)

Since there is no equivalent in business valuation to E=mc2, we are left with dozens of options, techniques, formulas, theories and opinions.

Sorting through the options and understanding all the jargon can be a full time job. In fact, some people – business appraisers, college professors and other experts with initials after their names – do make a career doing just that.

The other problem with all the theoretical material on the Internet about business valuation is that they never mention the buyer! Since the buyer is the person who has your money (or at least it will be your money once you give him your business) it might be a good idea to factor in their impact on the value of your business.

2 Basic Facts About How To Value A Business

So, here are 2 facts that if you keep them in mind, will help to simplify things and make the entire process easier.

Fact #1 – The purpose of doing a business valuation (assuming the valuation is being done because you are going to sell the business) is to develop an appropriate asking price range for your business.

You then advertise your business (and begin your negotiations) at the high end of that range. Ultimately, the prospects who are interested in your business will decide what the business is worth to them, they will make you an offer based on that and you will sell to the highest bidder.

Valuing your business for sale is not like taking a math test in school where there is one correct answer and you will be penalized if you don’t get it exactly right.

It’s really not all that complicated or intimidating when you realize that you don’t have to perfectly calculate the value of your business – because that perfect calculation doesn’t exist.

All you have to do is determine a reasonable (and aggressive!!) price range, get your business out on the market and let the buyers decide what it is worth to them.

So forget all the theory, and academic jargon – just come up with an asking price that you can explain and justify to the buyer based on how much money the business makes.

Fact #2 – The buyer will be giving you money for your business for only one reason – they want to enjoy the income and other benefits the business will provide for it’s owner in the future.

The “income and other benefits” are all derived from the earnings the business produces, so the earnings should be the basis of any valuation that will be used to establish a price range.

Even if using a “rule of thumb” or a multiple of sales is common practice within your industry you are still going to have to defend your asking price based on the company’s earnings.

No college professor, mathematician or “valuation expert” is going to buy your business – only an entrepreneur will. And that entrepreneur is going to be motivated by earnings.

So keep things simple: develop as asking price range, find good buying prospects and explain to them how the business generates enough earnings to allow the new owner to succeed even if they pay your asking price.

Business Valuation Multiples – How to Choose the Right Multiple For Your Business

Using a “Multiple of Earnings” is the most popular way to value small businesses that are for sale.

But that raises a difficult question: By what number do you multiply your earnings?

Much of what has been written about valuation multiples states that most businesses are sold with a multiple that ranges from 1-5.

But in truth, smaller businesses that sell for 4 or 5 time their earnings are rare – at least when it comes to owner-managed businesses.

In smaller businesses with an owner’s benefit of $50,000 to about $250,000, the owner will usually also manage the business on a day to day basis. The buyer is in truth “buying a job”. Their return on investment is much lower because they are investing not just there money but there time.

In larger businesses, where there is enough cash flow to hire a full time, professional manager the owner can make a return on his investment without a full time commitment – so that business will be valued at a much higher level. That’s not to say you can’t sell your business for a multiple of 4 or 5, but in my experience the vast majority of smaller businesses sell for a figure much closer to 1 to 3.

So I suggest you start with a multiple of 2.0 and use the list of factors below to adjust the multiple up and down based on your specific situation and you company’s performance.

This is just a partial list to get you started, there are bound to be unique factors that affect your business that are not listed here.

Positive Factors That Can Increase the Multiple

*Sales and profits have risen consistently each year for at least 3 years.

*A significant amount of sales come from repeat customers. Even better is revenue that comes from automatically recurring charges. Web hosting, alarm monitoring and self storage are few examples of business that may have reliable repeat revenue each month.

*Proprietary products, patents and/or trademarks.

*Exclusive rights to a territory.

*Less warranty exposure than is typical in your industry.

*Management And /or employees will stay on after the sale. The more experienced or uniquely talented these people are, the better.

*The business is a franchise of a well established – And well known – company. For many buyers, the support and training they get from the franchisor is a major plus – one they are willing to pay for.

*Your industry is growing and the future appears bright.

*Important ratios such as profit margin And cost of sales are above average for you industry.

*You are offering above average financing terms

For these last two items you should check with any trade associations that serve your industry. They may be able to provide you with facts and statistics that can help you show the buyer that your business is part of a growing industry or trend.

Negative Factors That Can Decrease the Multiple

*Sales and profits have been trending down recently.

*Sale and profits have been inconsistent or unpredictable in the recent past.

*Sales from your most important product have been down or stagnant.

*One customer accounts for a large portion of your sales – more than 20%.

*There are many businesses similar to yours that are also for sale. Or your products are widely available at many places – a “Me To” product a line.

*The business relies heavily on location for its success but the lease is not transferable or is about to expire. If this applies to your business, try to get an extension on your lease before you start to sell.

*Pending legal or government issues such as law suits or environmental concerns.

*Important ratios such as profit margin and cost of sales are below average for you industry.

*A large amount of obsolete inventory.

*The business is part of a weak franchise or one with a bad reputation.

*Too many old accounts receivable that will never be collected.

*You are not offering any financing

How Do These Factors Affect the Price?

Sellers tend to focus mainly on the positive factors when talking to buyers.

Buyers, however, tend to zero in on the negatives – or what they perceive to be negative. They are averse to risk and so they will always be on the lookout for problems.

If any of the negative factors listed above exist in your business you are not alone. Almost every business has some problems and they should not stop you from successfully selling.

That these problems exist isn’t the issue, how you deal with them is.

You have several choices when it comes to the weak points of your business.

You can lower your price accordingly and show the buyer how and why you have discounted your price by lowering the multiple, you can ignore the issues and wait for the buyer to point them out, and you can fix the things that are fixable.

Or you can do a combination of all the above.

If you have old or obsolete inventory, get rid of it and take the lose. The same holds true for old accounts receivable. The buyer will not pay you any money for these things and they will only help to create a negative overall impression of the health of your business.

Other factors – such as a decline in sales in recent years or one customer accounting for much of your revenue – can’t be fixed so easily in the short term. If you don’t have the option of holding on to the business for another year or two so you can improve these things than you will have to adjust the price accordingly.

Finally, there are those items that you don’t control such as the fact that there are many similar businesses on the market or you are part of a franchise that is struggling.

I would suggest that you not lower your original asking price because of these items. But be aware that the buyer will probably bring them up at some point so be prepared to deal with them.

Before lowering your price, try first to offset any of these negatives with some of the positives features of your business. Maybe there are many businesses similar to yours on the market, but if your profits have steadily increased over the last few years or if you have a favorable lease in place that is transferable, you can show the buyer how your business is worth the price you are asking.