What needs to be considered when contemplating buying a business?

Question

BP, this is not necessarily a REI question, but here it goes. What are some of the things that one should consider before deciding to buy a business?  In particular, a friend was approached about buying an existing dry cleaning business. I have no idea which direction to point her in. Supposedly the operation grosses $500k/month. Any thoughts?

Account Closed · Answer

I wish I could help , I would love to see some discussion on this one. I've saved up a pretty good junk of change and being only 23 I'm very attracted to purchasing a good business .

Karen Schimpf · Answer

When buying a business you want to make sure the business is cash  flowing (after all the write offs), that the last 3 years of tax returns  shows gross sales have either stayed the same or gone up, and lastly  the value of the business is what the seller thinks it is worth.  Many  sellers over value their business.  If the buyer is not going to get a  SBA loan, than I recommend before buying a business to get a business  valuation done. If their is real estate involved also get a commercial  appraisal done. Have an attorney that represents your best interest not  the sellers best interest.  Never take anyones word the value of a  business.  I can not tell you how many stories I have heard where the  buyer took the sellers word for the value of the business and found out  after the fact it was not true.

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website: http://applycommercialloans.com

P.S. No Risk Solution. When the Bank Says No, Come to Me to Get Your Deal Closed.  I  specialize in Small Business Administration Loans (SBA) and  Commercial Loans.  I help entrepreneurs attain financing for their  business or project. I BRING COMMERCIAL MONEY FROM AROUND THE COUNTRY TO  LOCAL MARKETPLACES INSURING THE MOST LIKELIHOOD OF CLOSING. The key is  placing the borrower with the lender that most suits that borrower's  strengths. I do it better than anyone.  Give me a call today at  O:512-650-8630 to get your loan closed.

Ronald Jones · Answer

Thanks so much for all of your input. I will relay the information. You all are awesome!!!

Joel Owens · Answer

The newest cleaners use the green systems.

500k a month is hard to believe without seeing the books for a dry cleaners. Doesn't matter if they make 100 million gross sales a year if net profit is next to nothing. Businesses with high volume and slim margins can go to losing money real fast in the marketplace.

The businesses with good sales and fatter profit margins can sustain changes better.

Ken Graham · Answer

One more thing that  just struck me. i have owned several businesses but have no inside knowledge about dry cleaning. However I do know that industry uses dangerous and environmentally problematic chemicals.

I would be VERY concerned with inheriting an expensive environmental liability problem created by  the previous ownership.

If I were buying this kind of business its something I would investigate carefully and probably have an outside expert involved.

Ken Graham · Answer

These are some things I would want to know.

* What is the net income and what is the recent trend over last 3-4 years? Will the profit be sufficient to pay down the debt and provide enough income for the buyer?

* Will the seller be available for consulting/ training during the transition?

* Will the seller sign a non-compete?

* Who are the key employees / management and will they be staying on? Are they under contract?

* What is the competitive landscape like? Who are the key competitors? What are their strengths and weaknesses?

* Are there any significant customers? Would they stay on if the business is sold?

* What sort of property leases are in place?