Useful Tips for Business Investors

Buying an Existing Business

When you buy an existing business, you are assuming responsibility to an existing customer base. Buying a business this way, you are most concerned with the ability of the business to continue to earn profits. The price you choose to pay for this business, therefore, is more related to the business' past profit earning record. One commonly accepted way of evaluating this business is projecting its profits for the next three years based on its last three years and discounting the present value (using present value tables) to this year. This suggests that you expect to get your investment back within three years.

You may also choose to buy a business that is not doing well, believing that you can use your knowledge and talents to make it succeed. Then the value you would place on it would have more to do with the replacement value of the assets of the business (plant, equipment & inventory) taken against what is shown on a current balance sheet, to be the book value of the assets and liabilities.

In some cases, you may wish to buy a business and resell it quickly; your success here would depend on your ability to identify businesses which can be turned around quickly and resold at a profit. You are particularly concerned with the balance sheet and the specific liquidity aspects revealed by it. This is what happens when the assets of a business are purchased from a receiver or a bankruptcy. Then you can either do a sort and a further liquidation sale, or you can pick up the pieces and attempt to build a new business from them.

Most people negotiating a buy/sell agreement for a business use the above methods in some combination. You negotiate for assets based on their worth to you. Beyond the asset value, you pay for inventory against cost figures (not retail dollars) and according to how current that inventory has been kept. You sort the inventory into current stock, slow sellers and dead stock. You shouldn't pay for someone else's mistakes i.e. dead stock. Slow sellers stock you might offer 50 cents on the dollar on cost, and for current stock, you pay near cost.

[Top]