Preparing to buy a small business

Purchasing a business with a proven track record and established clients and customers may seem appealing. Making sure you get what you pay for can be tricky. 

According to Chron.com, here are some tips for creating a successful purchase offer. 

Identify assets

Some of the assets are obvious, such as the buildings, equipment, contracts, receivables and cash. However, intangible assets may be just as (or even more) important. For example, you may need to purchase the company’s name and logo, intellectual property and software licenses. Zoning exemptions may also be necessary to continue doing business at the location. 

You will likely also need the company’s goodwill. This intangible asset is, like the others, nonmonetary and nonphysical, but unlike the other intangible assets, the company cannot sell it independently. Goodwill includes customer loyalty and business reputation, among other elements, and you will pay this premium over and above the fair value. 

Assess profits, budgets and value

Look back over the profits for at least the past three years. In particular, assess the changes in performance over the past 18 months or so, as well as the cash flow. 

The business should have an overall budget, but ask for other budgets, too, such as the manufacturing budget, payroll and overhead budget. When a budget does not include line items with details, request a breakdown. You may identify areas where expenses are high and find ways to improve profits. 

With these numbers and your estimate of your future profits, you can generate the company’s value to you. 

Prepare the offer

In your offer, list all the assets you want to purchase, as well as inventory and receivables. Request a noncompete agreement from the owner that ensures he or she does not use the company’s goodwill to start a competing business. Also have him or her sign a statement that there are no liens, judgments or lawsuits against the business.