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10 Tips for Buying a Small Business

March 25, 2010

Based on a survey conducted by Merger Network in 2009 among 350 recent buyers, a list of 10 Tips for Buying a Small Business was compiled.

1. Activate your Social Network. Friends, relatives, and business associates are the best resources to tap when it comes to looking for potential business opportunities,   according to recent buyers. Business intermediaries are another potential source for finding out about new business ventures. The majority of respondents indicated the web as the top place to start your search.

2. Get your financial house in order. One of the first things buyers suggest is to get your financing in order. Be sure you have enough money to cover costs for 12‐18 months, add 50% to your   estimates for unforeseen expenses and don’t forget about advertising and marketing budgets. Respondents cautioned prospective buyers to keep the economic downturn in mind when preparing forecasts. Be conservative and be prepared.

3. Seek Professional Help. Consider enlisting support from Brokers, Lawyers, and Accountants. Rather than putting a team in place, be sure to put the right team in place. Research any professional you might consider using and check references before moving forward with your transaction. The majority of respondents who worked with an intermediary reported that they felt they paid the right price for their business. The majority of respondents who did not use an intermediary expressed regret for completing the transaction solo and felt they could have got a better deal, or had a smoother transaction if they had sought help from a professional.

4. Buy what you know. If you are looking to get up and running quickly, buying a business with which you are already familiar removes some research cycles, recent buyers pointed out. If you cannot buy what you know, buy what you like at the very least. Respondent indicated that buying a business related to your field of interest helps commitment and performance.

5. Be diligent. When you find a business you like, conduct a thorough investigation into financial affairs. Apply the most scrutiny to its liabilities. You cannot be too careful with regard to the financial state of any business. Keep digging until you are fully satisfied. If you are not, walk away from the deal, regardless of how far down the line you are. Some recent buyers also found it helpful to work in the business or do active observation as part of your research. This way you know what to expect when it comes to both the financial and day‐to‐day reality of the undertaking.

6. Find out why the business is for sale. Retirement is a common reason for a business to be on the market. Recent buyers noted that a business on the market because of retirement often shows it has generated money and it should point to decent goodwill with a pool of satisfied customers. Avoid businesses that have only been in the current owner’s hands for a short period unless they can point to valid reasons why they are selling. It could be that the business is much harder to run than it appears, it could be that it is not making any money, or worse still, it could be reporting a major loss.

7. Put the time in. Most respondents spent up to 10 hours per week looking for a business and found one within a year. Careful evaluation combined with patience is a recipe for good business buying, recent buyers noted.

8. Add your own value. In addition to getting several business valuations, take the time to do your own independent valuation. Be sure to thoroughly analyze the market and make educated guesses about market shifts that may impact the business. If you can’t do that yourself, hire a professional. Look at upside and downside cash flow and develop a range of valuations. Based on this analysis determine your target and maximum purchase price and then decide whether to proceed.

9. Drive a hard bargain. Negotiation and bargaining harder topped the list of things that buyers said they would do differently when buying a business. If negotiation is not one of your key strengths, then consider working with a business intermediary. It may be a worthwhile investment.

10. Offer less for it. Whatever figure you had in mind, offer less. You can always increase your offer later, you can’t reduce it. So offer less, and if the owner is really eager to sell, they might surprise you, and accept your offer.

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