5 Tips For Buyers

1.  Be prepared to demonstrate that you are financially able to complete the transaction.  Most serious sellers hire intermediaries to pre-screen potential buyers.  Don't be offended if you are asked to supply proof of financial information, provide references, or for permission to check your credit rating.   

2.  Expect to provide a non-binding letter of intent (LOI) to the seller and to deposit 10% to 15% of the asking price of the business in an escrow account prior to seeing all of the seller's financial statements and tax returns.  You will have a period of time to conduct due diligence that will be specificed in the LOI.  If the records provided during due diligence do not support what the seller has stated, you can call off the purchase and your deposit will be returned with any interest that accrued.

3.  Select a business that fits your intended lifestyle, personal preferences, and skills.  For example, if you plan to be an absentee owner, avoid businesses where many customers pay in cash like restaurants and bars.  If the business requires personnel that possess special skills or are licensed in certain professions such as an
automobile repair shop, dental practice, or roofing contractor, consider whether you have the skills and/or licenses to work in the business.  If you don't, consider the impact of cost of hiring qualified employees to the bottom line, especially if the seller currently works in the business.

4.  When evaluating the financial performance of a business, remember that some costs are discretionary and some are not.  Expenses such as rent, most utilities, and taxes are generally not discretionary and will have to be paid regardless of who owns the business.  Many costs are discretionary however.  The classic example is the business owner who employs his lazy brother-in-law.  As the new owner, you can fire the brother-in-law and add his salary back to the bottom line.  Evaluate the business based on what you think your costs will be.  Any competent accountant can help you do this.

5.  Close quickly.  Once the deal is made, try to close as quickly as possible.  You do not want the owner to have second thoughts or news of the sale to leak out to employees, suppliers and clients.