Question Details	Asked By	Asked On
want to buy a running business, but need HELP!!!!	netto	09/29/03
I went to business broker who gave me info on a few businesses that interest me. I went to visit them as a customer, and found one I want to buy. NOW what??? How do I know what the current owner says is their net profit each year really is? How do I know if the gross income is what they say it is? The expenses? The everything else you can imagine? I feel very intimidated by this process, and scared to even contact someone to ask. I don't know who to contact even. An attorney? What kind? An accountant? I haven't asked the broker, because I know he's working for the business owner. What do I do??? HELP...PLEASE HELP!!!! Thanks :D
Clarification/Follow-up by voiceguy2000 on 09/30/03 4:31 pm: Yes, the process should be scary, especially if you have no experience owning and running a business. I have to say that in my observation, our culture and our educational system prepares people to be employees, not owners, and there will undoubtedly be a lot of adjustments in thinking that will be forced on you. You might want to take a look at the book The E-Myth Revisited by Michael Gerber to get some perspective on what you are about to undertake. It is available at bookstores in inexpensive paperback. At this point, you need to work through the following steps: 1. You need to make some wise decisions on what area of business to look at. Consider whether the service or merchandise involved is something that you would be happy working with. Also consider the economic trends affecting your choices. For instance, dry cleaners were traditionally quite profitable, but many have fallen on hard times with the trend toward more casual business dress, coupled with increasingly strict environmental rules. 2. As you narrow down your choices, you will want an accountant to help you understand the financial side of the business. I would look for a small practice, with maybe 2 or 3 senior people and a handful of juniors, that has experience with small businesses. Talk to some other local businesses to get comments and recommendations. Interview 3 different outfits to get a feel for what is out there. You want the accountant to help you understand the financial side of the business you are considering. In your shoes, I would want to see not only annual financial statements, but also the business's check register(s), general ledger, and bank statements going back at least two years. The accountant should be able to discern whether the business owner is manipulating things to make the business look more profitable, or to conceal costs or liabilities that might surface in the future. Also confirm that all state filings and payroll remittances have been made on time and in full. 3. Once you have gotten a strong candidate lined up, a lawyer's help in negotiating the actual purchase would be helpful. As I mentioned, you should have a lawyer examine all real property issues (such as a purported sublt or assignment of leased premises). But the lawyer can also help with warranties, indemnities, non-compete terms, earnout provisions. Again, I would look for a modest-sized law practice that has experience dealing with small and medium sized businesses. The business-oriented practices tend to be "downtown," whatever that may mean in your particular location. I would not use the Yellow Pages as a source, because the people advertising there are more consumer-oriented (criminal defense, personal injury, divorce, bankruptcy). What you want is a firm with lawyers that went to good-quality law schools and operates a business-oriented practice. Ask for referrals through local Chambers of Commerce or trade associations. Also check to see whether a local bar association offers referrals. You can search for lawyers on the Martindale-Hubbell web site, www.martindale.com, by location, size of firm, and practice areas. If you have found an accountant you trust, that may also be a source of referral. Again, I would talk to 3 different ones to get a feel for which seems best for your needs.
Answered By		Answered On
voiceguy2000		09/29/03
An accountant would be helpful. There are a lot of ways to play games with the numbers in a company's books -- for example, inflating sales by making a lot of "friendly" sales to people who turn around and return the merchandise. Generally speaking, when a business is for sale, there is a reason. If you don't immediately see the reason, you can be sure there is one that you are not seeing. I would take the numbers supplied by the seller and adjust them for likely reality. For instance, you can stand outside the store and watch to see how much traffic there is, and how much people are buying. If there is little traffic, and/or people are walking out empy-handed or with very small bags, you would have a basis not to believe rosy statements about the store's sales volume. Also, talk to neighboring merchants, and even the local police. Find out what the neighborhood is like, what trends are in evidence. Take the figures you are being given, and then change a couple of assumptions to see how sensitive the business (especially its profitability) is to swings in those assumptions. Make sure that the owner has not deferred maintenance or delayed payment of things that will come along to bite you. (This is where an accountant would be helpful, in showing you what ought to be on the financial statements of the business.) If the "sale" of the business purports to include assignment or subletting of leased premises, read the lease carefully to make sure the "seller" actually has the right and power to do this. This is an extremely common "gotcha" in business brokerage deals -- the landlord sticks you with a massive rent increase because the previous tenant has no right to hand the property over to you. Make sure every penny of all payroll-related taxes has been paid, and paid on time. You may become liable for any gaps the previous owner created. I think it is highly unlikely that you will find a small business owner who goes to the trouble and expense of preparing audited financial statements. I would recommend the book Business Buyer's Kit: Everything You Need to Know to Find, Buy, and Finance a Business for $500,000 or Less by Michael Smorenburg. I do not know how easy it would be to find at a local bookstore but you might try that, or order it from Amazon. Also, your local Small Business Administration office will have a lot of information that may be helpful. And at some point you will probably want to have an attorney look at the paperwork, and suggest additional protections (indemnities, warranties, earnout provisions, etc.).

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