Strategies for Buying

 

Before contacting sellers, potential buyers should prepare a document that outlines for themselves their desired sales price, terms, and conditions. 

You also will need to consider the shop’s investment yield, taxes, and the effect the business will have on your personal life. Basically, buyers should be looking for establishments that will meet their numbers and ones that they are going to be happy working at 12 to 14 hours a day. 

Buyers should prioritize their objectives and consider the trade-offs that must be made to attain them. Buyers generally want to accomplish the flowing objectives:

• • Best possible sales price. Serious buyers and sellers compromise on the sales price, terms, and conditions in order to reach a mutually satisfying end. Buyers are usually willing to trade price for terms and conditions. Most buyers will draw the line at a sales price that exceeds the shop’s replacement cost. 
• • Reasonable down payment. Most serious buyers are willing to maintain a 1:1 debt-to-equity ratio. Many buyers want to lower their down payments to reduce risk, and unfortunately, find themselves with businesses that cannot support their debt load. 
• • Reasonable initial investment. Serious buyers are willing to match dollars of debt equally with dollars of personal equity. Buyers do want most of their equity to go towards the down payment. 
• • Maximum future profits. Buyers are buying a shop’s current financial performance but always are looking for the highest potential revenuegenerating business. 
• • Reduced possibility of failure. Only one out of five established businesses that are purchased go under. That is much better than the four-out-of-five failure rate of new businesses. 
• • Enhancement of borrowing power. Most lenders prefer financing an existing, profitable operation to a new venture. 
• • Minimizing tax liabilities. Buyers need to be aware of the tax consequences of the shop they are buying. Both buyer and seller should work at minimizing taxes. The only way to ensure that this happens is for both parties to hire accountants.

Buyers, too, should develop a purchase plan that lists potential sellers, analyzes their motivations for selling, analyzes the businesses, and develops planned responses to counteroffers. Research into a seller’s motivation is crucial here and can serve the buyer in a number of ways. The following is a list of major seller motivations:

• • Owners who want to retire 
• • Disillusioned owners who do not know how to remedy their problems 
• • Owners with tax problems 
• • Owners with other investment opportunities 
• • Owners with di stressed properties and insufficient cash flow to fund remodeling 
• • Distressed owners with profitable operations, but troubled personal relationships

Once a buyer has responded to a sales solicitation, he or she will receive enough information to determine if the shop meets or exceeds investment requirements. The buyer should do more preliminary work to find out further specifics about whether a shop is a good business opportunity. One of the best indications is the shop’s real property lease payment. If it is less than or equal to 6 percent of the shop’s total sales volume, it is probably worth further investigation. 

When a buyer decides to pursue more research, he or she should tour the facility, learn the lease highlights and other purchase options, and evaluate the neighborhood, competition, customer viewpoint, history of ownership, and the owner’s reason for selling. After doing a deeper analysis of the shop, the buyer must once again determine if it meets his or her investment requirements. If so, an earnest money deposit and offer should be delivered to the seller in return for detailed information on the shop.