What needs to be considered when contemplating buying a business?

6 Replies

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?

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 .

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?

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.

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.

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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Karen Schimpf
Commercial Capital, Ltd.
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