What to consider when buying a business?

May 3, 2007 by mrbizplan.

Napers asks:

I am looking at buying a small restaurant in my town.  They are asking around $350,000 but there is only about $200,000 worth of assets and nets about $50,000 in income.  How can I determine if it is worth the asking price.  Is there anything else I should consider?

Mr. BizPlan answers:

Lets break this question down into its parts:

Preparing to Buy a Business

At a minimum you should get two to three years of historical income statements (more if they are available).  These will help you identify any trends that are occurring in the business and give you an idea of the potential profitability.  Understand that most small business owners try to minimize their tax liability so there may be some expenses that aren’t exactly necessary or business related.  Another common occurrence is sales that never hit the books (called skimming - it is also called tax fraud - but hey, it happens all the time).  Taking these into consideration you should be able to build projections based on reasonable assumptions.  If the seller says that he takes $1000.00 out of the tills a week add back $800.00 and then make sure you adjust for the taxes they should have been paying.

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