Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, April 12, 1990 TAG: 9004130736
SECTION: NEIGHBORS PAGE: S-3 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Saunders is with Roanoke's Jefferson Business Group, whose clients are buyers or sellers in small-business deals.
The fatal mistake, he said, is buying the stock of the corporation because that's how most people visualize a transfer of ownership.
The way to buy a business, he said, is to form a new corporation and acquire the assets of the business.
Anyone who buys the stock assumes all liabilities of the corporation, which may not immediately show up on the balance sheet, Saunders said.
Unable to support the higher debt, the business fails several years after purchase, Saunders said. And the owner never understands what went wrong.
Know what you're getting, Saunders said, adding the advice to hire an accountant to appraise the accounts receivable, inventory and other assets.
If you are going to run the business yourself, he said, know your strengths and weaknesses. Select a company with a compatible management team.
If you will be an inactive owner, or if you don't know the business, be certain that the management talent will remain with you.
Assess your financial resources, Saunders said, and set limits on your investment so that you will be comfortable with the amount at risk.
Saunders said you can't buy a business the way you would a house. The investigation may take nine or more months, he said.
Bill Bundy of Bundy & Associates, a business broker, said his rule of thumb is that first-year earnings should equal the down payments.
For example, if you buy a convenience store for $53,000, he said, you may pay $32,000 up front. Your annual earnings should come close to the latter figure.
Bundy said you also need enough working capital to cover losses for at least one or two months. Even an established business has some tough months, he said.
It's difficult to find a well-run small business, he said. He believes it's more important to find a good business than a familiar one.
He estimated that 90 percent of sales are financed by the former owner. It's almost impossible to obtain bank financing for buying a small business.
Be sure you understand the company's financial statement, Bundy said. You may earn less as an owner than you did as an employee, but at least you know how much income you'll earn.
Jim Hodges, who handles business brokerage for Hall & Associates, said anyone buying a business must know the basic survival skills.
He listed record-keeping, financial management, personnel management, market analysis and break-even analysis.
An entrepreneur must know the business he's entering, Hodges said, and must have communications skills.
New business get into trouble because they don't have enough money going in, he said. Immediate cash flow is the main advantage of buying an existing business.
Anyone buying a business needs help from an accountant to analyze what are usually bad records, he said.
Hodges said the seller's tax forms are a more reliable guide than a financial statement because nobody inflates taxes.
You have to find many figures, Hodges said.
Among them are gross sales, net profit, rent, taxes, utilities, gross payroll and the owner's salary.
If there's a lease, how long does it run? If the landlord kicks you out, Hodges said, you have to start over.
What is the inventory and what is its value? Hodges said some inventory listed on the books may actually be stale.
What is the value of equipment and fixtures and, if applicable, the real estate?
Look into available parking, Hodges said, because customers go where it's easy to park.
What licenses or franchise agreements will you need and can they be transferred? Hodges said an alcoholic-beverage license, for instance, isn't transferable.
Why is the owner selling? There may be many valid reasons, Hodges said, but often the real reason is that the business is doing poorly.
Will the owner help finance the sale? There are tax advantages to the seller in following this route, he said.
Study the financial structure of the sale, Hodges said. The business must give out enough money to cover reasonable income for the owner, reasonable return on cash invested, carrying the debt service and a dividend or profit.
by CNB