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


When is the best time to buy a business?

April 6th, 2010

You have been debating on buying a business but can’t find any available that meets your criteria.  You are frustrated because you desperately want to find something but can’t find anything.  What do you do?  Let’s digress and look at the real estate market at the moment.  In some cities such as Toronto, there is an extreme shortage of houses.  It appears that everything that is listed gets sold very quickly.  As a result, anyone who is selling a house today keeps increasing the price because they believe that someone will pay the asking price.   Eventually, the house will become over priced and it will sit on the market.  All reasonably priced houses sell almost immediately.  Is this different that buying a business?   Not at all but investors do not draw an analogy between the housing market and buying a business.

 

Remember, when times are tough, many good businesses are not put on the market for sale.  They wait until the profits recover and once they have been stable for 3 years, the business is put up for sale.  Two years ago, we had a recession.  Depending on a company’s year end, they may have only shown one good year since the recession.  Since many buyers look towards historical financial statements, not enough time has passed since many businesses were very profitable.  If the owner of the business waits an extra one or two years, the amount that they could receive for the business could increase significantly.  For example, if profits could increase by $100,000 per year for a three year period, that could be worth an extra $300,000 or more to the owner.  From an investment point of view, it will be much more profitable to wait two to three years then sell the business and hope that they can make the same returns in the stock market.

 

In summary,  I believe that there are not a lot of good businesses on the market at the moment.  Many of the better businesses may not be put up for sale for another 1 to 2 years.  As a result, you have two options, look for an existing business and watch your pricing.  Based your purchase on economics and do not fall in love with that business.  Pay what makes economic sense, not what the owner is asking to receive.  That may or may not be a realistic price.  If the owner can sell for an inflated price, he is the winner and the buyer of that business make take a long time to recover his money.

 

 

Remember, buying a business requires patience and discipline.  If you pay top dollar and the business is not that profitable, how long will it take for you to recover the excess purchase price?  A typical investor wants to recover his original investment on an after tax basis in 3 to 5 years.  If it takes 10, was that a good investment?  Economically no, but if you had a lot of personal satisfaction, then it may have been worth it to you.


Filed under: Buying a business — Gary Landa @ 9:04 am


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