Deseret News Archives,
Sunday, February 24, 2002

Edition: All
Section: Money
Page: M01
Length: 71 lines

Go slow when buying a firm

I bought one such a business a few years ago for $750 down and an interest rate of 14 percent on the balance. Frankly, I don't remember the total price I paid. But I do remember that after making some minor course corrections, cash started flowing in at $24,000 a month with a profit of more than $7,000 a month.

Why would the owner of a business doing that well want to sell it on such ridiculous terms? Did I somehow take advantage of him? Absolutely not! We both got what we wanted. He wanted out of the business; I wanted in. I would hope that all who purchase ongoing businesses would do as well.

Unfortunately, they don't. My experience -- and the experience of many others -- indicates that buying a business presents most of the same dangers as building one from scratch, plus a few more. Following are some steps I would take before I would ever consider finalizing the purchase of an existing business.

1. Put $1,000 down with an escrow agent. This will make the owner know that you are serious but also give you time to check it out thoroughly.

2. Ask for financial statements and tax returns from the past five years and get an appointment with the person who does the company books. Take an accountant you trust with you to ask the hardest questions he can think of about all aspects of the company's finances.

3. Offer to purchase only company assets. Do not purchase corporate stock. Assume liabilities only if they are very long term and will be subtracted from the asking price.

4. Talk with a business broker about similar businesses for sale. Compare asking prices for businesses with similar sales volume as the business you are considering buying.

5. Carefully review the company's tax returns. See what trends you can discover. Ask your accountant to do a similar analysis.

6. If it is a retail operation, hire someone to count customers going in the store. Compare that with the receipts. This will tell you a lot -- including how effective the sales personnel are.

7. Don't buy accounts receivables unless they are highly discounted.

8. Find out how much the owner is paying himself in salaries and draws. Do you want to work that hard for the amount he is receiving?

9. Is the business you are buying inclining or declining? Some industries are saturated or trendy. Or perhaps the owner knows about a national competitor opening up across the street.

10. Negotiate hard when it comes to price and terms. The terms are often more important than the price. You will never make more money per hour than when you are negotiating.

And remember, it is not too late to say "no" until you have signed the paperwork. Sure, the seller may be upset, but better he or she be upset than you be burdened with his or her problems for months or years. Don't let the seller tell you that you have a moral obligation to buy the business since other potential buyers were told you were going to buy it.

If you purchase a business, you will probably own it or it will "own" you for a long time. Be extremely careful about examining every aspect of the business. If you find anything that does not feel right or smell right, make sure you get a good answer before you move forward.

One final warning: Remember the phrase, "Buyer beware." That is good advice no matter what you are buying, but especially if you are buying an ongoing business.

Stephen W. Gibson is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.

© 2001 Deseret News Publishing Co.