So you want to buy a business? Let’s not go into all the reasons why you might be interested in purchasing a business, let’s get right down to whether or not the business you’re considering is profitable, and whether you’ll be able to achieve your financial goals if you purchase the company.
Chances are good that if you are interested in purchasing a property that is listed by a commercial real estate agent or by a business broker that the business will have been appraised professionally. This valuation will include an operating value from one or more of the following approaches.
The operating value of a company includes the assets which may be equipment furniture fixtures or intangible such as goodwill that are required for the business to operate at its current profitability. In addition, the person that evaluates a company considers the market value of the company. The cash flow and market value estimates create a yield or a rate of return on your investment. There are industry rates that will provide an indication as to whether or not the company you are interested in purchasing has a better or worse than average rate of return on investment.
Using the income valuation approach involves understanding the pretax cash flow with a corresponding rate of return and after-tax cash flow rate of return as well. The method of valuing the company depends on the industry and while your business broker may be responsible for gathering all of the information it is prudent for a CPA who understands forensics accounting to look over the final estimated value of the company. A commercial lender will certainly require this as will the SBA.
Additionally, a qualified business consultant will be able to create a pro forma profitability analysis based upon income potential that had not been realized by the current owner. This would include diversification strategies, additional markets, along with marketing and sales programs that the current owner may not have established. So in addition to the current state of the business, you also want to understand what you can do to make the business more profitable in the future.
You should expect a detailed list of all the furniture fixtures and equipment along with the dates of sale and maintenance documentation. Your new company will have procedures and processes that have been established which will help you run the company after you take over. You should also expect to be trained thoroughly on every aspect of running the business. If the company was listed openly on the market you will want to know whether or not the employees are remaining or whether or not there was significant turnover when the company was listed on the market. You also will probably want to know whether or not the customer base was affected by a public offering of the company. If the company was listed confidentially by business broker this should not be an issue.