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Identify Your Personal Interests & Skill Sets:
What areas of interest do you excel in? Do you have a special skill set that would be a good fit for a particular field? If you determine that you really have no idea what type of business you want to invest in, you need to be honest & realistic with yourself; use the process of elimination & perhaps that will help determine what area and type of business you should pursue.
Know how much capital you have to personally invest towards the business loan:
There are some programs out there that will require a minimum down payment of 10%. However, most conventional lenders will require at least 20% down. In addition to the initial down payment, you will also have to factor in other expenses such as appraisals, advisory fees and operating capital…..etc.
Find out why the business is for sale:
Does the owner want to retire? Has strong competition moved into the area? Understanding why the business you are looking at is for sale is very important.
Determine if the price is right:
The current performance and recent track record (last 3 years, in particular) of the company will usually dictate where the business needs to be from a pricing standpoint – not as much weight should be put into “potential” or arbitrary forecasts when determining price. The first course of action is to make certain the business creates enough revenue to service the debt. Obviously, if this is not the case – the business is, more than likely, overpriced.
How active is the current owner?:
Clearly, there’s a huge difference between an owner who works 50 hours a week, versus a “hands-off” owner who has strong management in place and periodically gets updated on the status of the company a few hours a week. These 2 scenarios are either a prelude to YOUR level of involvement or, potentially, an additional managerial expense you will have to incur ad take into consideration. Owner’s participation/salarie(s) can also factor in when doing cash flow analysis.
Ask the owner to stay on for a specified period of time:
You need to make sure the transition of ownership is smooth. You never want to upset the apple cart – particularly if the apple cart has had a successful track record. So, since the prior owner has run things a certain way over the years and established many relationships with clients, employees and future customers, you need to observe how things have been done historically before making any necessary changes.
Who gets the receivables?:
The receivables and payables of the business need to be accounted for. If the receivables are, for instance, at $500k & payables are at $350k day of closing, there is a value of $150k that should be factored into the deal.