Buying an existing small business does not need to be a difficult or expensive process. We have a system we have been using for the past twenty years and it has proven to be highly effective.
Nearly all businesses are sold on a multiple of the owner's earnings (cash flow), or in some rare cases, a percentage of revenue. The vast majority of the businesses we have sold ended up selling for 2 - 3 times cash-flow.
As an example of how we guide buyers through the process, let's say we are selling a service business is Fairfax County that has sales of $750,000 annually and a cash-flow to the owner of $150,000 and that it has been pretty consistent at these levels for past three years, and the asking price of this fictitious business is $375,000 or 2.5 times the cash-flow of the business.
A buyer looks at the business and likes it. They ask for financial paperwork including Tax returns, Profit & Loss statements, and balance sheets for the past three years so they can analyze the business and come up with an offer. Here is where it can get complicated.
Nearly any small business a buyer looks at will have tax returns that do NOT accurately portray the true numbers of the business. Small business owners do not have their tax returns prepared to impress anyone, they have them prepared so that they can pay the minimal amount tax possible. I would guess this is the case in 90% of the businesses we sell. Secondly, in most cases, businesses with revenues less than $800,000 typically have poor accounting records or none at all.
At Capital Business Brokers we have our buyers focus on the bank statements of the business. Bank Statements do not lie. Totaling the deposits for the year gives an accurate look at what the true revenue was. Yes there are some instances where there are large accounts receivable, but they represent a small portion of what we sell and quite frankly, their annual deposits are what the owner had to pays his bills and receive his cash-flow.
Back to the offer...in some cases the seller's do not want to release their financial information until the have a signed "Offer to Purchase". This will freak a large number of buyers out, but it shouldn't. Many ask how they can prepare an offer if they have not seen the financials of the business. Here is where we go back to what i first wrote, nearly all businesses are sold for a multiple of the businesses cash flow. The seller says he is earning $150,000 per year and asking two and a half times that for the business.
Let's say the buyer makes a offer and negotiations conclude with the seller accepting an offer of $300,000 or two times cash-flow. We require any offer we write to include this contingency "This Offer is Contingent Upon the Buyers Review and Approval of the Business Financials". This is a very broad contingency that offers the utmost protection to the buyer.
Many buyers will immediately want to hire an attorney and accountant at this point. We highly advise buyers to wait to do this until we have met with seller off hours and looked at his bank statements and basic financial info. If the seller says they are earning $150,000 per year we want them to prove it to the buyer within an hour or so. We attend these meetings with our buyers, and we have seen business financials from more than a thousand companies. Seller's typically tell us the whole story behind their business. The things they would never tell their bookkeepers or accountants. So most times we can irregularities or false claims. If we find a seller intentionally making false or misleading claims we drop them immediately. Our motto is if a seller can't prove it, it doesn't exist. So if for example, we had our meeting with the seler and they could only prove $125,000 in cash-flow, but claimed they received $25,000 under the table with know proof, then we would recommend the buyer either drop their offered price or walk away from the deal.
If the seller was able to prove the $150,000 in cash-flow, now is the time to bring in the accountants and Attorneys. We highly recommend buyers do not spend money on expensive professional services, until they have personally verified a seller's revenue and cash-flow claims. If a seller can not do this within an hour or so, as a buyer you should walk away.
***Remember - Bank Statements Do Not Lie***
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