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5. Don’t say, “I’ll know it when I see it.” If you’re unsure, answer this: Would you start a vacation by going to the airport, buying a ticket and getting on the next plane out? Wouldn’t you study travel brochures and get opinions from people who have been places? You can learn what they liked and what mistakes they made, so you can plan the best trip possible.
It’s wise to know the type and size of business you want because brokers show their best listings to buyers who specify what they want. Brokers and sellers screen out buyers who don’t specify the type and size of business wanted as well as the features it should have. If you’re not sure of the best business for you, a good Business Buyer Advocate TM can help you decide.
6. Don’t buy a business that can’t pay for itself. Profit should service debt, provide reasonable owner salary/benefits, plus earn a reasonable return on and of your investment.
7. Don’t waste time on a dumb deal. Contender or pretender? Look for a better business to buy if the business does not match your acquisition criteria. You may not know this until you begin to verify the seller’s representations. A Business Buyer Advocate ™ can show you how to quickly get relevant facts and screen out businesses that are not worth buying. Time is money.
8. Don’t be limited to financial analysis. The truth about a business relates to the nonfinancial factors that influence value, such as the business’ relationship with its employees, customers, suppliers, landlord and sources of financing.
9. Don’t forget to do a cash flow forecast. Working with the seller, prepare a post-sale, after-tax, monthly cash flow forecast for 24 months. This is the time during which you are most vulnerable. The owner may not be fully aware of the seasonality of his business, especially the negative monthly cash flow.
10. Don’t assume the asking price has anything to do with value. The seller’s asking price is not the benchmark from which a wise business buyer makes an offer to purchase. Successful business buyers make their initial offer from the perspective of an independent, competent business valuation.
11. Don’t think “discretionary” cash flow can pay debt. Don’t think “discretionary” cash flow is available to finance debt. Is owner’s salary discretionary? Is health insurance? Is depreciation? Absolutely not. Treating these as though they are discretionary expenses is a big mistake. Doing so means you earn less than the business would spend to compensate a manager. It could cause the business to become insolvent, which puts your personal assets at greater risk. Use the business’ net profit, after fair owner compensation, to retire debt.
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