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Print Edition StoriesFriday, October 31, 2008
Inside Finance Strategies
Use your financial smarts when buying a business
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Thinking of buying a business? Doing so can be a smart move because it’s generally less risky than building a company from scratch. Plus you’ll benefit from gaining experienced employees, existing facilities, ready-made operations, and established customer and supplier relationships.
Sometimes the hardest part about buying a business is finding the right one. Brokers can help you identify suitable candidates, but trade associations and chambers of commerce can also provide good leads. Your suppliers may have inside knowledge of customers that are or may be planning to sell. And professionals, such as your CPA, lawyer or other consultants who specialize in the type of business you’re seeking, may possess similar information.
Once you locate an attractive business, there are certain issues to consider before you sign on the dotted line.
Valuation and price: The price you’re willing to pay for a business should be based on an objective assessment of its value. Valuation analysts or appraisers use several methods when valuing a business.
For example, an asset-based approach focuses on how much it would cost to replace the business’ tangible assets with similar ones in similar condition. A market approach looks at what similar enterprises have sold for, making adjustments to account for differences between those companies and the one being valued. And the income approach uses a discount interest rate to determine the present value of a future stream of earnings. Appraisers often look at all three methods when setting a value.
Due diligence: When conducting due diligence, make sure your team of advisors reviews several years’ worth of the target company’s financial statements, payroll records, tax returns, titles, deeds, inventory and contracts. Verify not only the existence of property, equipment and inventory, but also the condition of those items.
Due diligence also includes assessing whether there are any environmental concerns, liens, legal actions, zoning constraints or other unresolved regulatory issues that could make any real estate undesirable.
And the approach should extend to the intangibles. In other words, the business needs to feel right. Will you be able to relate well to the employees and customers? Is the business in a location you find desirable? Is it a business you can put your heart and soul into? If you can’t answer yes to these questions, keep looking.
Business plan: What are you going to do after the sale closes? Make sure you develop a new business plan that includes an analysis of strengths and weaknesses; strategies and tactics for reaching certain goals; and financial projections. Remember that a well-thought-out business plan is essential to your ability to secure financing.
Financing: If you are like most buyers, you may not have the necessary cash to make the purchase outright and you’ll need some form of financing. Assuming the terms are reasonable and it’s offered, owner financing can be an attractive option, because you may avoid the sometimes difficult process of securing bank financing. Plus, you may not have to provide personal guarantees.
Current economic conditions are such that many banks have shortened the term over which they will lend, or have ceased lending altogether. You will need to consult with your banker about available capital before making the offer. Also check out Small Business Administration programs, and “angel” or other private investor sources. The type and availability of financing can affect the overall price.
Once the deal’s done: Depending on your own knowledge of the industry and the customer base, you may want to ask the previous owner to stay on and help you learn the ropes. That may also help you retain valuable customers and suppliers during and after the transition period.
Finally, make sure you get your CPA involved from the get-go. He or she can help you in your search for a business, perform the business valuation, and help you secure financing and crunch the numbers so you don’t get in over your head.
Edward J. Giardina is a shareholder of Braver PC and has over 30 years of experience as a certified public accountant and a certified valuation analyst.
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