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How To Separate Good Versus Bad Listings
How To Separate Good Versus Bad Listings
Finding what you want is easier if you look for a few items
Richard Parker | Diomo Corporation
Some listings have a lot of relevant information and others seem to have almost nothing. How do I separate the good from the bad ones? What should I be looking for so I don't waste my time?
Insofar as the detail of the actual information or lack thereof, please understand that you cannot buy a business off a listing. Quite often the initial information you'll see online is akin to a classified ad. Further investigation is always warranted.
A lack of information is not a reflection of the viability of the business nor does an abundance of information mean it's good. As a general rule, if the business is of interest to you send in an inquiry to learn more. In a detailed listing, there are over 70 things to look for but, in the initial listings, at the very least you'll want to examine the following:
First and foremost, make sure the business interests you. Look for key points that would make this business a solid candidate for growth (i.e. exclusive territory, large repeat client base, double digit revenue/profit increases, growing industry, etc).
Confidentiality is the key for a seller so the description may be generic but it will provide enough information so you can determine the industry that the business is in specifically. Good businesses sell very fast in today's market so by identifying the precise category of the business (if it's specialized) will allow you to begin gathering industry and competitive information.
Assemble some specific questions relative to that particular business to ask of the include seller/broker when you hear back from them.
My favorite term; to me it's an invitation to negotiate. So don't worry about the price but of course be reasonable. You won't buy a million dollar business for ten bucks but there is room. Likewise, don't chase listings that you know are beyond your reach. The average small business sale over the past seven years has been within 14% of the asking price. Of course, there are other ways to creatively structure a deal where the actual price plays less of a role. It's all in the terms!!
Seller's Discretionary Cash Flow:
The terminology may vary from site to site but you need to determine more than just the business' profit. As the new owner, you need to know precisely what cash you will have available (assuming everything remains the same) to service the debt, generate a salary for you, and fund the business/ growth.
As such, find out exactly what's included in the number being represented. Pay attention to "add backs" to be sure they are reasonable.
The selling of businesses is most often a down payment driven transaction. The asking price is far more flexible. Every seller has an amount that they want "in their pocket" after closing which is the down payment amount. Again, this will prove to be far more rigid that the purchase price.
Many listings will list the price only, or the price and the down payment as the same, but rest assured EVERYTHING is negotiable. A seller listing the willingness to finance, or if the business has pre-qualified for financing, is usually well worth investigating further.
These may not always be shown initially. A seller will usually put the most simplistic, "idiot proof" and basic skills in this section because the more specialized the greater the buyer base. As an example, they almost always mark: "general business/sales/marketing/administrative" which doesn't mean much but if they list a specific skill pay attention!
Reason for sale:
Personally, I like all the morbid ones: death, divorce, etc. They usually mean a more motivated seller. However; relocation and retirement are also good indicators. I'm always leery about "other business interests" as a reason. I can never understand what someone's other interests can be if this is such a good business! But, you never know.
Some listings will include financing terms, asset values, lease information. Others may not. Regardless, the seller/broker will have more information beyond what's been posted.
You'll have an email address to reply to the ad and often a link to the broker/seller site. Remember confidentiality is important to the seller so your initial inquiry can ask a few basic question but the most important thing is to ask them to forward a non-disclosure agreement to you to sign. Then, you can begin to ask the real pertinent questions. Check it out as it will give you an idea of their professionalism plus they may have additional listings on their site which are usually more detailed
Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.