What Buyers Look For When They Buy a Business

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Buyers always want to know how long the business has been around

Jeff Slaton says “A business with a long track record means there are good reasons for that business to be operating. It will be well known in the area, and people will be used to patronizing the business or using its services. The longer it has been in operation, generally, the better the business. They will also want to know about the employee situation, especially any key employees”.

They also want to know how long the seller has owned the business

The longer the present owner has been in business, the more likely he or she has been successful. People don’t stay in business if they are not making money. They may want to know why you bought the business in the first place and compare that against your experience having owned it.

Buyers always want to know why you are selling your business

A prospective business buyer will usually want to know why you are selling your business. They know that business owners sell for a variety of honest reasons, but sometimes not, so a savvy buyer will want to be sure he knows why you are selling. You need to be ready to honestly answer that to the buyer’s satisfaction. If the owner of a business has been in business for six months, is 37 years old and wants to retire, the buyer will be suspicious. The more valid the reason for the sale, the more realistic the buyer’s offer will be. Why you are selling is an important question-consider your answer carefully.

Why Books and Records are important

A business buyer will want to investigate your financial track record and brand equity. They want to know that they can easily pick up where you left off, without suffering any financial setbacks. The financial records of your business are a good indication of how well the business has been doing over the years. But, there is a difference between your financials as reflected by your tax records and your true financials. Tax records are not designed to show a business in the best light when it comes time to sell your business because no one likes to pay more taxes than they have to Generally, tax returns are a worst case scenario. The buyer needs to be shown which expenses are non-cash items, such as depreciation, and business use of home and vehicles. An accountant or business broker can help you with this. Then, your financials can be recast to reflect its “True Net Income”. Sure, a buyer will see the tax figures, but only after also seeing the differences between the two ways of accounting and identifying what the “True Net Income” is.

Buyers will value a business on reported income only

Buyers can consider only the income that a seller can show them. Although not reporting all income is against the law, we all know that cash type businesses sometimes do not report all income for tax purposes. This “underground economy” has been well documented and is in the billions of dollars. Sellers may tell a prospective buyer about how much they are “skimming,” but wise buyers ignore their statements, since they have no way of proving these amounts. As you would expect, buyers base their buying decisions on what they know for sure. Business owners that report their sales accurately may pay more in taxes, but their businesses sell at a higher value because they show greater income. Virtually all buyers figure that a business will sell for less than the asking price. Expect that. Buyers will want to negotiate, sometimes aggressively. That’s where a good business broker will be worth his salt. When selling a privately held small business, pricing is as much art and marketing as it is fact and financial history at times.

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