SHOULD YOU OVERPAY FOR A BUSINESS?

by Willard Michlin
Kismet Business Brokers

Willard Michlin

I have been a business broker for over 20 years. I have heard every justification in the world for why this owner’s business is special and deserves a price at top market.

The Buyer’s problem.

The difficulty for a buyer is two fold. The asking price presupposes that the reported sales and profit are applicable for this time frame, not years ago. Ninety percent of the time the profit is a lie, which makes the asking price unimportant. For the remaining ten percent, the profit and sales figures are accurate and based on the current month’s numbers. This is when the profit level becomes critical. If it is a small profit, and only affords the owner a low wage, it is stupid to pay too much just for a job. If the profit is substantial and more then the buyer needs, it might actually make sense to pay top dollar or even more. This might happen when there are others bidding on the business.

The Reason

The reason is that in this economic climate, the numbers of businesses making a desirable profit are small. If you can find one of those “keepers”, it is worth paying a premium to get it. If you over pay wisely, the business profit can support the extra cost. When all the loans are paid off the price will be forgotten. Of course, if you are lied to about the numbers, then any price you pay is too much. The reason the sellers lie is simple. They know that if they told you the truth you would not buy the business at any price or at a price so low the seller figures he might as well just keep it.

The Buyer’s Solution

So first make sure you have the business reviewed in and out and upside down. Have your CPA and broker put it through the audit from hell. If it still looks good after that, you may have found a diamond. In those rare cases, consider paying what you must in order to not let that good one get away.

Willard Michlin is a CPA, and Due Diligence and Business Evaluation Advisor. He has published many articles and is in demand as a public speaker in the Southern California business community. You can write to Willard at Willard@EvaluateABusiness.com and he will always answer your questions. He can also be contacted at his Seal Beach, California, office by calling 805.428.2063. See other articles and information about his services at: Business Buying Services

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