To find businesses for sale my first advice – without the encouragement of”bring the grill for my sardine”- is to contact a licensed business broker. He knows the laws of the State and he knows all the formulas to provide you with healthy and profitable opportunities.
You can also browse the ads in specialized magazines and newspapers, attend trade shows, visit businesses to push their movement and talk with people who are immersed in businesses similar to the ones you want to exploit, as well as with professionals related to the world of businesses such as bankers, lawyers, and accountants.
If you consider yourself a good manager, look for businesses that are not doing well and that with your experience and ability could be revived. Beware of businesses that decline due to obsolescence or because the geographical area of location is depressed.
When a going concern is acquired, the buyer assumes the responsibility of serving an existing client base and, at the very least, maintaining the same levels of profitability exhibited by the previous management. And it is precisely based on historical profitability levels that the sale price is set; A widely accepted rule of thumb for evaluating a business is to project the profits of the last three years on a straight-line basis for the following three years, discounting the present value from the base year. In this way, it is assumed that the investment would be recovered in a maximum period of three years.
A buyer could also acquire a business that is not doing well with the idea of applying his managerial knowledge to rescue it. In this case, you can buy at the “skinny chicken” price, but you must take into account the market value of the replacement assets compared to the book value of the assets as they appear in the updated balance sheet of the company.
In some cases, a savvy buyer may purchase a business solely to speculate on its early resale and not to exploit it directly; once it has been upgraded, the buyer will put it up for sale or may simply sell the assets separately.
Most buyers tend to base their decisions on a combination of the above criteria of profitability and the company's equity value. It is important to consider how inventories are valued; when the "due diligence” – diligence prior to the purchase- the quality of the inventories must be taken into consideration and segregated according to their market price and their usefulness in the production process, when evaluating their fair purchase value.
Pay special attention to the reason the owner is selling the business. Look at businesses you would like to buy if the owners want to sell due to retirement, boredom, partner problems, divorce or poor health; this way you will realize that you are not being sold a “hot potato”.
And, last but not least, it is essential to thoroughly evaluate the terms of the lease; the period of validity, the renewals and the escalatory clauses of the canon are the key elements of the “leasing” contract.
And to end this article, I offer you this prudent quote from Seneca, the great Latin philosopher: “Buy only what is necessary, not what is convenient. The unnecessary, even if it costs a single penny, is expensive. "
Alfredo Gonzalez Amare*