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Step 1
Determine the asking price of the business from the selling agent or owner of the business.
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Step 2
Gather the business's financial information. This includes any lease; building status information; inventory of equipment and products being sold along with the business; customer lists; and vendor lists.
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Step 3
Analyze the financials. Go over the profit and loss statement to determine if the business is making or losing money and whether revenues are increasing, leveling out or decreasing over time. Look at monthly cash flow to determine if money flows through the business regularly or has peaks and valleys. Based on your findings, come up with an initial asking price.
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Step 4
Look at lease information for the business’s building (if applicable). Check the history of rent and the building's utility costs to determine if they are increasing or remaining level.
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Step 5
If the building is leased, determine necessary upgrades and who is responsible for making them. Also clarify who is responsible for the building’s upkeep; the lease owner or the lessee. Make certain the owner will continue to rent the property and clarify any changes in lease terms. Calculate all new costs associated with the building’s rental and determine the percentage of that cost that should be deducted from the business’s asking price as determined in Step 1.
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Step 6
If the building is part of the purchase, determine whether it is sufficient for the needs of the company. Issues to consider: maintenance costs, location in terms of future growth, safety, utility costs, necessary upgrades. Figure out if any utility costs can be cut and what upgrades may cost. Calculate the percentage of upgrade costs that should be deducted from the business’s asking price.
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Step 7
Examine the equipment. Determine if business equipment is functioning properly or in need or repairs or replacement. Calculate how much money you'd need to allot for new equipment or repairs, then deduct all or a portion of this from the business’s asking price.
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Step 8
Examine the product inventory list. Analyze product loss and turnover ratios. Determine how quickly products must be turned around; revenue needed to replenish product inventory, and potential lag time between purchase and final turnaround. Calculate whether cash flow will cover all expenses as well as inventory purchases during the estimated lag time. Figure out how much inventory you'd need to purchase if you bought the business and deduct that cost from the asking price.
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Step 9
Evaluate the customer list. Determine if it is current or out dated. Look for evidence of customer loyalty--or lack thereof. If possible, ask current customers if they'd continue doing business with a new owner or choose a competitor. Strong customer and vendor lists have a monetary value that you should allow for in the business’s asking price. On the other hand, lists that indicate a decline in customers or vendors could effect the company’s bottom line and a certain percentage of the asking price should be deducted to account for those problems.
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Step 1
Compare similar businesses in the area. Find out if they mirror the company’s profile, are growing more rapidly or have begun to fail. Look for reasons for positive or negative changes among competitors and how they could relate to the business you'd like to buy. Find out what a similar business in the area has sold for recently and compare with the asking price of the business you're considering.
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Step 2
Evaluate employees. Find out if the sale of the business requires all employees remain for a specific amount of time. If so, for how long? Read employee records to determine if there are any employees who aren't meeting business standards. Compare salaries and wages against the norm in the industry to see if they are inflated or within scale. Determine whether you'll need to make any employee changes that might affect the business’s bottom line. Figure any employee increase or decrease might effect the business offer. For example, if a new employee must be hired in order to operate the business properly because of an ineffective employee must be kept, the cost for that new employee can at least be partially reduced from the business's asking price.
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Step 3
Examine workman’s compensation issues to see if the business might have safety concerns that need to be addressed. In most states, these records are required to be on file within employee records. However, it is also possible to check records with the state agency responsible for workman's compensation. Also verify that the business complies with all local, state and federal Occupational Safety and Health Standards, the Americans with Disabilities Act, the Immigration and Naturalization Act, and the Fair Labor and Standards Act. Knowingly purchasing a business in violation of any of these acts could spell big trouble for a new business owner.
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Step 4
Find out whether the company has been involved in previous lawsuits, especially any that are still pending and could reflect upon the new ownership. Calculate any outstanding monies to be paid as a result of the suits.
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Step 5
Verify that all taxes have been paid. If they haven't, calculate any back taxes, fees and penalties and deduct that amount from the business asking price.
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Step 6
Add all of your calculations and compare the total amount against the business’s asking price. Determine how much you are willing to pay for the business. There may be pieces of equipment, supplies, materials or other items within the business that you do not wish to purchase. You may try deducting such items from the asking price, leaving yourself and the current owner some room for negotiation. Make the offer based on the lowest amount and negotiate from there.
