This article are provided for information purposes only, and are not intended as legal advice.


Is now a good time to buy a business?

October 6th, 2009

 The economy is slowing down, many businesses have been hurt by poor sales, too much capital is not being utilized and now the owners of the business is thinking about retiring and selling the business. Is this a good time to buy a business?  Sales are down, the downward trend may or may not have been stabilized, the company may be losing money and are hoping for one more customer to come so that they can break even again.  They may have bought too many assets in prior years and now are unable to sell the assets to reduce debt.  The debt to equity ratios are not good and the company is under pressure to inject more capital into the business in order to meeting operating loan covenants by its bankers.

 

If you are a synergistic buyer that can reduce overhead and integrate with your existing business, now may be a good time to buy a competitor.  The purchase price will be lower than in the boom years and if there is enough synergies that exist, you may be able to stop the losses and make some money immediately.  Over time as the economy improves, the profitability of the newly acquired business will grow quickly. 

 

Is the seller willing to sell at a realistic price or does the seller of the business believe that it is worth more based on what it used to earn?  I have seen some sellers of businesses say that if we get this one new customer, sales will increase, we will be profitable again therefore I want to be paid based on sales which we do not have today.  How do you deal with this?, Make part of the purchase price contingent, if the sales materialize and stay for a period of say 3 years, then pay them an additional price based on the estimated profits which this new customer would generate times a multiple to determine the goodwill value of this additional business.  This puts the onus on the vendor to obtain the new customer and ensure that the new customer stays after the business has changed owners.  This should generate a win win situation for both sides.


Filed under: Buy a business — Gary Landa @ 9:32 am


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