If you are serious about becoming a small business owner, purchasing an already existing business that has had a track record of success is one of the smartest ways to dive right in.
A shockingly high amount of small businesses end up folding within five years, so by purchasing a business that has already established itself in the community, has a track record for success, and has obviously been serving a need in the community provides you with a more rock solid foundation from which to build off of and really make your own.
At the same time, buying a small business is always fraught with risk and potential pitfalls you need to be able to avoid at all costs. Here are some tips and tactics to help you make smarter decisions when you are purchasing a small business.
The biggest mistake that first-time small business owners make time after time is overpaying for a business that they just aren’t sure of how to properly evaluate.
As a general rule of thumb, small business values are usually linked to cash profits – and most businesses of this type are sold at 2.5 times the amount of cash profits made in a year. Average annual profits are usually pulled from the last five years of operation, and any business that costs more than 2.5 that amount is almost always going to be too expensive to seriously consider.
There are exceptions to this rule, of course, but it’s definitely a smart thing not to overpay for a business that may not ever be able to provide you with a predictable return going forward.
Always do your own due diligence
The sellers of the small business you’re interested in purchasing will inevitably provide you with a tremendous amount of information and data about the company, its history, its customers, its past, its reputation, and its profitability.
At the same time, you need to dig into the company yourself, never taking this information at face value but instead actually cracking open the books and having a look for your elf – or hiring someone to do the same thing for you.
This is the only way to know exactly what you’re getting into without fear of being swindled.
Pay ridiculously close attention to the financials of this business
You have to be 100% sure that you understand not only the financials of the small business that you are thinking about purchasing but that you also understand the financials of this business, this industry, and this marketplace as well.
It’s really easy to go off of past performance and overestimate how well this company is going to perform in the future, but you don’t want to get caught purchasing a typewriter style business just before the dawn of the computer age. You have to be smart, you have to be savvy, and you have to be intelligent about the financials of the business to make sure that this investment is rock solid before you take the plunge.
About the Author
Morris Edwards is a content writer at CompanyRegistrationinSingapore.com.sg, he writes different topics like Ways to Save Money for Your Business and Top business tips for 2017 and all topics related to Singapore, Company Incorporation and Singapore Company Formation.