When most first-time business buyers first call us, they have only one request – they want to go see some businesses. They want to drive by, pop in and take a tour.
This is exactly the opposite of what a new buyer should ask for. You are buying a business, not a house – and the differences between the two are huge.
A house is four walls and the stuff inside. To make a judgement about whether or not a particular house is a good investment, you need to walk around and have a look at those four walls and the stuff inside.
An operating business is not four walls and the stuff inside. The four walls are usually leased from someone else and the equipment and furnishings are the assets of the business – not the business itself. Yes, when you buy a business you also buy the assets, but that isn’t all you are getting. You are getting cash flow.
You can’t drive by, pop in or take a tour of cash flow. You learn whether or not a business is a good investment by looking at the numbers, by talking to the seller, by going over inventory lists and by examining contracts.
The depreciated value of the equipment, the furnishings, the vehicles, even the color of the paint have very little to do with how a business is priced and should have very little to do with how you judge the price of a business. As such, tours are really not that important. Aesthetics can be easily changed once you take over – so focus on how the business makes money instead.
A better way to look at businesses starts with a conversation with an experienced and qualified business broker. In this initial conversation you and your broker will talk about what your goals are for business ownership and then search for businesses based on those goals. Once you have a few businesses in mind your broker can help you decide if the price is fair based on the numbers and also help you decide if you want to pursue more information.
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Have more questions about buying a business? Check out these articles or get in touch by clicking here.
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