The Crazy Entrepreneur

Good or bad idea? Depends on how you look at it, but I think there are positive aspects to buying a business by the end of the year and it could also be advantageous for buyers. Usually around this time we see an increase in activity with those who are buying or selling a business. I think it has to do with the fact that now summer is over and that there are only a few more months left for them to reach theirs goals before the end of the year.

When buying a business close attention will have to be given to the historical financial data of the past three years. Looking at the past nine months of financials will give you a good idea of how the business is performing so far. And you can estimate what the annual totals might be for that year by simply dividing the year to date totals by 9 and then multiplying them by 12. However be careful, this will not be enough! You need to also pay attention to the seasonality of that specific business. Each type of business has its own highs and lows throughout the year. To have a better understanding of this you need to compare side by side the totals of each month from the previous years and at the same time take into consideration the periodic outside influences which may affect the sales or costs. By following the movements and understanding the reasons for the fluctuations can help provide you with a clear picture as to what you could expect for the following year.

Another aspect to take into consideration is the type of business it is. You may need to have a slow transition period in order to make the transition into the new business easier, or you may want to transfer the business prior to the yearend holiday season. In many cases sellers are also more motivated to get to an agreement and transfer the business before the end of the year. Buyers too might rather prefer to begin the New Year fresh so that in the beginning of the year they can immediately start implementing their plans.

In conclusion, the last quarter of the year might well be the best time to sell or buy a business.

Since the beginning of this year we are noticing an upward trend in the “business for sale” market. One of the reasons for this increase is that business owners are seeing that the overall business performance is improving. Many business owners who previously planned to sell their business were forced to put their plans on hold due to the recession and the drastic decrease of revenues. They had to focus on survival and implement the needed adjustments to keep their business afloat and make it profitable again. Their efforts have begun to pay off and gradually the general business performance is improving and as a result more profitable businesses for sale are coming on the market. In general, retail, restaurants and service businesses seem to be doing well while manufacturing businesses are still struggling.

While financing businesses is still tough it seems that capital availability is slowly improving as a result of the aforementioned overall business climate improvement. We expect that this trend will continue and that financing will become more accessible to buyers. With the sale of smaller businesses partial seller financing remains a key factor in order to be able to put the deal together and close the transaction.

A smart buyer will take many aspects of a business into consideration and not just the asking price. The seller should be aware of them and make sure that these aspects will not reflect negatively from the buyer’s perspective. The asking price must make sense to the buyer. They need to see a correlation between what the business is producing in revenues and the asking price. You cannot have a business selling for $1M and only making $100,000 a year. There would never be enough cash flow to pay back the investment. Just like the value of a home is derived from its location, aesthetics and overall condition. A business also has a multitude of factors that contribute to its value.

A well-organized business will have the proper profit and loss statements available for the buyer to look at. The expenses should be in line with the industry standards, and a buyer familiar with that type of industry will know that. It will also show if the business will be able to create sufficient cash flow for future growth.

Historical data showing past performance will help enhance the image of the business’s financial stability and growth pattern. Even if the past few years have shown a downturn, as long as the business revenues were strong historically, then most likely as soon as the economy improves the revenues will too.

How long the business has been in existence and its reputation is an important factor and you should be able to see that in the historical data. There should be a connection between the number of years the business exists and the overall growth of the business. Businesses with strong reputations will have a growing list of loyal customers and will normally tend to feel less of an impact in a down market than those who don’t.

With restaurants location is important. Visibility from passing traffic helps with exposure to new potential business. Advertising in local printed media will only reach a certain amount of people. If however, you have a good visible location that is also easily accessible, then as long as you have a good product to offer they will come. Sometimes buyers want to know if the business can be relocated. Well that depends on the type of business. A restaurant is less likely to be more successful if moved from an already good performing location, whereas a manufacturing business is more concerned with logistics and expansion capabilities. Internet driven businesses like online stores or even mail order businesses don’t need a storefront location as long as they can ship and receive products from where they are at.

That brings us to web presence. Does the business have a strong web presence? In today’s electronic world allowing access to customers, so that they can see the products and get information, is another key to success for many businesses. Phone books are becoming a thing of the past and almost everyone nowadays is surfing the web on their PC or smart phone. They prefer to see what that business has to offer without having to physically be there. I myself like to be able to review a restaurant’s menu before taking the time to drive over there, only to be disappointed with their menu selection. Having and maintaining a website can be very time consuming but in today’s world can only add value to a business.

If the business sells a lot of products, or needs to buy raw materials to produce a product, then proper management of inventory is vital. Certain businesses like retail need to carry a large amount of inventory in order to provide enough choice to a customer, so that they do not walk away empty handed. If it’s poorly managed then the business owner will end up with what is called “stale inventory”. In other words the inventory becomes of little value.

What about the employees? If the business has employees then a buyer needs to look into how long they have been there. Are they loyal to the owner and have they shown good job performance. When a seller is selling their business the most important thing to remember is confidentiality. If the employees know about the sale then this could have an adverse effect on the value of the business. As business brokers we maintain a very high standard of confidentiality and we make sure that the seller as well as the buyer understands why.

It is hard to cover every single aspect of a business as each business is different. As I mentioned in the beginning, price is not the only thing to consider. The combination of the different elements make up the true value of a business, and the above should give you a general idea.