Buying a Business: Ask These Four Questions First
According to the Q1 2024 BizBuySell Insight Report, small business acquisitions grew 10 percent in Q1 2024 as compared to Q1 2023 — despite inflation and higher interest rates. And why not? There's much to be said for buying that restaurant, miniature golf course or boutique that's grown over time into a well-loved and thriving brand.
But the fact that the business is up and running isn't reason enough to assume it's a sound business transaction with long-term potential. Make these considerations before signing the letter of intent.
Is the price really right?
According to at least one small business survey, an amazing 98 percent of business owners don't even know the value of their own businesses.
So how can you tell if you're getting a good deal or not? You can hire a business appraiser or valuator to do an evaluation. Though some CPAs perform this function, official evaluations must be conducted by a certified professional valuator. Organizations such as the National Association of Certified Valuators and Analysts, have created standards for this designation, and offer a directory of members. Valuators can determine a firm's value using one of three ways:
- By asset value. This is the simplest way to set value. The appraiser calculates the business's assets and liabilities to determine the net value. This approach can be useful in cases of buying a store with inventory and/or real estate.
- By income. Another straightforward means of determining value is to look at gross income, expenses, liabilities and rate of growth. This is a potentially smart approach for buying a service business, such as an insurance agency or a creative firm.
- By market value. This is the most complex of valuation methods. The valuator determines the price by looking at businesses in the same industry, and of similar size and maturity. It's a sound approach for a business that has a huge, established brand behind it, like a hot clothing accessory that's made serious social media inroads.
If the seller hasn't already conducted a valuation, you can request one, though you'll likely be shouldering the cost. Estimates vary widely, though a preliminary appraisal can cost $3,000 to $10,000. But if you have the time and resources, consider the investment. By doing so, you're also establishing that the company has been operating with the highest level of financial savvy and ethics.
Know that many intangibles also go into a sale price, including current trends. For example, restaurants have charted a 9 percent increase YOY in Q1 2024 — and a 13 percent increase over the previous quarter's sale prices.
If a business is thriving, the previous owners are likely to command a hefty price, and justifiably so—they deserve a solid return on the time, energy and capital they've invested so well. The quality of the existing business should be reflected in its price, so you might have to lay out more to purchase a strong business.
You're buying a reputation — but is it a good one?
Getting an already launched brand gives your takeover even more momentum. Since this business has already been up-and-running, it has an existing customer base that will keep coming back for more under your ownership—at least in theory.
However, what if there's some ill will among current or former customers? For example, chronically bad reviews on the restaurant or pub you have your heart set on. Or maybe the owner of the billiards parlor for sale made an unforgivable statement that leaked to the local media, and there's been a backlash? These mistakes can haunt a business for years and affect your ownership, even if you didn't open the business when they occurred. The scale of effort needed to fix a bad impression might not be worth it, even if the business looks promising otherwise.
What's its work culture and ethos?
We all know the importance these days of providing employees with a healthy and harmonious workplace. You may see smiling waitstaff or salespeople when you visit the business, but is there discord in ranks? Rapid turnover? Sites such as Glassdoor can provide valuable insights on the culture and ethics of a company. However weigh what you read carefully: A single disgruntled former employee may be stating exaggerated grievances.
Don't be reluctant to put a mystery shopper to work, if the type of business accommodates it, to see how the employees treat an everyday customer.
Can you truly "make it your own?"
When you buy an existing business, you're stepping into someone else's vision. Still, you'll want to put your own stamp on the operation.
You may want or need adjustments such as hiring additional staffers, remodeling or relocating, or upgrading equipment. However, making your mark on your new business calls for finesse. After all, you don't want to alienate that existing customer base, turn off a loyal staff with deep institutional knowledge, or otherwise damage the brand.
If all the good research you've done helps you identify the areas you want to change and their challenges, you stand a better chance of succeeding. However, you may also find that you can't change the business to suit your own vision without causing business-killing problems. Sometimes it's better to find a different business to buy or choose to start your own instead.
Buying a business isn't about finding the best deal on the market; it's about finding the best fit for you and your entrepreneurial goals. Ask these questions and you'll be on your way to making a smarter deal.
Did you know?
Acquisition can provide a capital edge. Since a successful business should have cash flow from the day you take ownership, it may be easier to obtain additional working capital from lenders. You'll already have revenues, profits, and other financial statements in hand — not just rosy projections.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
