Buying A Business? Or A Headache?

Starting a home-based business from scratch can be a daunting prospect. An alternative is to buy a business that’s already up and running.

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The problem, of course, is that for every profitable and stable business that becomes available for sale, there are many more qualified buyers than sellers.

And you have to wonder why someone would be selling a perfectly good business. Often your “opportunity” is someone else’s headache. As you research the opportunity, you need to look for reasons the owner is selling beyond what he or she has told you. Is the business losing money? Is it cash poor? Has it reached it’s peak and now it’s on the way down. Has something artificially inflated income or reduced expenses in the past year or two? Is a new competitor threatening to take business away? Is there some regulatory change looming? Are product costs poised to escalate? Is there some technology on the horizon that threatens to make this company obsolete?

The good thing about purchasing an existing business is that you have the opportunity to the historical numbers for hints about what’s really going on. As a buyer, you have every right to review the tax returns for the business you are buying as well as the financial statements and supporting documents such as agings of accounts receivable (what the small business is owed from customers), and accounts payable (what the small business owes to its vendors — and if the operator is paying within terms). If you’re not comfortable evaluating the numbers, be sure to have someone do it for you. This could be the biggest opportunity of your life or the biggest mistake.

Unfortunately, you can’t believe everything you see. Even copies of tax returns have to be suspect. That why, for example, based on the demonstrated lack of integrity of many sellers, all tax returns are verified with the IRS when banks are processing SBA loans.

The internet can provide you with background and access to research data on most industries. We just discovered our local library provides free access online to InfoTrac, a collection of over 47 million full text articles from 4500 magazines and most newspapers going back to 1980. Industry membership organizations and franchises are a great source of information too.

If you want to borrow money, a lenders primary concern will be the company’s historical cash flow. If your seller claims they “really make more than we report”, it’s not going to convince your lender unless you can actually document the missing income.

Remember that a lender will not finance 100% of your new venture. You’ll need to have equity (your own money) in the business–at least 25-30% for an SBA loan; demonstrate that you have the management experience to run the business; and demonstrate that historically, the business generated sufficient cash flow to pay off the loan.

For more help on small business loans, angels and other private investors, venture capital, government loans and grants, preparing a business plan or financing application, and other money management advice, check out our all new, fully revised eBook, Finding Money–Secrets of a Former Banker.

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