Buying a Business?

I'm thinking about buying an established local business. The current owner is planning to retire in a couple of years,and I'd like to be ready to buy when the time comes. It's well established, successful and I know it very well. I'd like to learn as much as possible about the numbers behind it, but I'm not ready to show my cards to the owner.

What sources of public information should I go to in order to establish a value for A) the property and B) the business?

Are you buying a job or an investment? I think 100K is all I would pay for a business and only then if I could be sure I would be able to recoup that investment within a year or two. Changing owners is incredibly hard on small businesses, be sure you have a solid plan for growing the business, not just hoping to live off of existing established business base, keeping customers is by far easier than winning them, but it is impossible to fight things like turnover in the purchasing department, retirement, relocation and such.

As far as public information is concerned I think you can get the property tax and estimate the value of the businesses capital, (real estate, equipment, inventory) oh and hire a lawyer and CPA, if you are lucky those two can be the same person.

Also is this a manufacturing type business or a service one?

Until the books are cracked, IMO, you are pissing in the wind. Just because it is around and functioning doesn't make it "healthy".

Ranger50 wrote: Until the books are cracked, IMO, you are pissing in the wind. Just because it is around and functioning doesn't make it "healthy".

This. No way to value the business without getting a very good look at the books, preferably by an accountant who deals with a lot of small businesses.

1. There are certified business appraisers.
2. People ALWAYS think their business is worth more than it really is.

DILYSI Dave wrote: People ALWAYS think their business is worth more than it really is.

QFT

Ranger, Boxhead and Dave nailed it. Real estate you should be able to approximate by looking at selling prices near by. As far as the business, an accountant needs to go through the books with a fine tooth comb. Usually value is net adjusted profit plus real tangible assets like real estate and equipment. Some businesses use a multiplier, anywhere from 2-4, to figure value as well. It depends on the type of business. Good luck!

I was looking into buying a business some time ago. When I mentioned to the owner I would need to see his book, he said a lot of his business was under the table. Needless to say, I didn't buy.

Business appraisers are the way to go. Take it with a grain of salt.

In reply to iceracer:

Good choice.

BoxheadTim wrote:

Ranger50 wrote: Until the books are cracked, IMO, you are pissing in the wind. Just because it is around and functioning doesn't make it "healthy".

This. No way to value the business without getting a *very* good look at the books, preferably by an accountant who deals with a lot of small businesses.

In many cases, the owner wants a non refundable deposit up front before they will let anyone look at their books. An acquaintance was looking at a couple of local delis that are part of a larger chain, he put down something like $10K and when the books were opened, it didn't look so hot so he backed out. Of course he lost his $10K.

There is also 'double entry bookkeeping', one set for the bank and one set for the tax man. Many times business owners skim off a lot of (unreported) cash too, seen it lots of times. So the 'under the table' comment is not that unusual or far off but is still cause for concern. Remember, you have to use the income from the business to pay off the debt you incur. That means there would be a paper trail for you that he/she may not have.

Watch the business from across the street and check the dumpster for boxes / invoices after hours