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Don’t have any confusion about it, buying a business for sale is a multi-step process with each step being essential. You should never think about proceeding to the next position until the preceding step is complete and whatever you do, don’t be tempted to short-cut ever. You can view any time spent in preparation and in the revelation of facts and figures about the business to be well spent and as such you will be ensuring that no horror stories come back to haunt you when you take over.

A lot of information can be revealed before you even talk to a prospective seller. One of the most important questions you must ask yourself before you go forward is what kind of enthusiasm you possess for the type of business you have your eye on. Is the industry that you are looking at of particular interest to you and do you really want to get actively involved in everything that it represents? Be advised, that unless you want to be a completely “absentee” owner and are considering the many additional steps that you need to take if this is the case, you should be enthusiastic about the business that you are getting involved in.

When you are conducting your due diligence, make sure that you inspect all documentation:

* Financials: including profit and loss statements, balance sheets, reconciliation documents, payroll records, tax reports. Be wary if the seller says that there are a lot of “cash sales,” as unless these have been declared to the tax authorities, you cannot count them and they should be ignored.

* Employee records: including information on individual behavior, attendance, length of service and pay scales.

* Licenses: including federal, state, city, county as appropriate, plus any certification licenses you must possess to operate the business. Be prepared to consult records independently to see if there have been any discrepancies or problems in the past.

* Equipment records: detailing the age, cost of replacement, any required inspections and associated results and details on maintenance investments.

* Inventory records: re-saleability, turnover and overall condition.

* Supplier contracts: including portability, alternatives and goodwill.

* Property records: are any rental agreements transferable to you without any problem, as this can be particularly important.

If you find that all records, licenses, contracts and agreements are in order and are workable for you going forward, you may be wondering how to arrive at a good value when you buy business assets. There are many different ways of looking at this. Some of the methods used to calculate include:

* Asset-based multipliers, are where a total value of the assets is used to determine a value.

* Rule of thumb, where industry benchmarks are used to establish the value (not recommended).

* Revenue-based multipliers – a percentage is applied to monthly or annual revenues (not recommended).

* Cash flow multiplier – where the business owner’s profit is added to the salary and realized perks, with a number of expenses deducted. This is most often the most appropriate way of valuing the business for sale.

Any number of documents and figures can be used by the owner to back up a claim and it is up to you to take these at their value and determine the appropriate conclusions. You need to look at the reputation and age of the business, what level of competition you may expect, the existing legal structure, quality and physical location of the premises and last but by no means least, the difficulty in obtaining a new lease. When it comes to a business for sale, all will help you to determine whether you should buy a business like this, or not.

Richard Parker is the President and founder of the prestigious Diomo Corporation – The Business Buyer Resource Center. His celebrated materials, seminars and consulting have encouraged thousands of aspiring business buyers from around the World to pursue their dream to buy a business.

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