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

Buying a business – buyers beware

December 3rd, 2008

Typically businesses are sold based on their past performance because past performance is a reasonable indication of the future as long as there has not been any adverse change to the business.  When a new listing appears, they will give you historical sales and profits.  If the current economic downturn is affecting the sales, it may not show up in the current year’s financial statements.  For example, if the business for sale has a December year end and the business had a banner first six months of the year, the slow down in the last six month may not affect the entire year’s financial statements.  If you project the sales and profits of the last few months, then the projected profitability of the business may show a totally different picture.  In this case, you should base the purchase and sales agreement on the projected earnings which are less than the historical earnings.  If not, you may over pay for the business and you may find that the profits are considerably lower than your original projections, if you based only on historical information.

In these turbulent times, you should contact an advisor to help you decide the valuation of a business in the current market.  In Canada, you can contact Gary Landa or any business broker.

Filed under: Buying a business — Gary Landa @ 8:06 am

1 Comment »

  1. Gret site you have here and very informative. This blog post is particularly of interest. Another thing especially with any small business they tend to rely on the owner or one or two key employees to such a great degree that when that personmaybe out of the business there may be a substantial fall-out, much greater than the picture that the former owner may have painted. That is also whay it is integral to use a proper advisor when scoping out a business, evaluating it and buying it. A proper escrow agreement and non-compete contracts have to be put in place to help abate much of the risk.

    Comment by Dennis - Buying a Business — December 19, 2008 @ 3:26 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment

You must be logged in to post a comment.