Don’t Be Naive When Buying A Business

We talk to many buyers of businesses, frequently franchises, and they end up getting in real trouble quickly because the promised revenue is not there. The debt is up in support of the purchase price and the revenue was way overstated and doom is impending.

There are two big issues – overstated revenues and competition from the original owner when he moves down the street and takes his business with him after selling it to you. Both issues come up over and over.

The first problem is that buyers believe the financial reports provided by the sellers and sellers fabricate the reports all the time. This pumps up the sale price and supports the sale but it’s a disaster in the making. The other issue is the non-compete agreement. This must be very enforceable and can only be made such by withholding part of the purchase price and basing it on revenue received going forward. This will keep everyone very honest indeed.

Both issues are easy to prevent with a significant hold back of cash delivered based upon performance of the business. Another way is to check real data and the only valid and dependable data is bank statements. This tells you what the sales volume really is and if the owner says he pockets cash, well, that’s too bad. He does not get credit for cheating the government. If he pockets cash then it just does not count because it cannot be confirmed.

Follow these few guidelines and you will have a much better result when you purchase a business.