Entrepreneur: 5 Points to Help Quickly Evaluate a Business for Sale

“As an Entrepreneur looking to buy a business of your own, its important to evaluate deals quickly, and efficiently”

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As an Entrepreneur evaluating a business for sale can be a long drawn out and daunting task of looking through multiple deals, financials, understanding the business model, how the owner has run the business etc. Every deal has lots of moving parts and can fall apart at any time, if one or a few points either don’t fit a buyer or a seller. So the big questions is, where do you start? What points should you be looking at as a buyer right off the bat?

For us we want to get a pretty good idea of a business, by looking at a few quick key points. While it is an exhaustive list, if a few of these points don’t make sense, we usually ask our buyers to move on to the next deal. Again while these points are important, they are merely the first of many steps before going any further.

1. Financial Information

2. Customers

3. Employees

4. ROI

5. Future Potential

Financial Information

In most cases, when someone is buying a business, the first thing they want to look through are the financial statements for the last 3 -5 years. As business brokers would always advise to give a heavier weightage to the previous year versus the 3 or even 5 years ago. While a business will not perform exactly every year, and previous history isn’t a factual indicator of future performance, conducting a strong horizontal and vertical analysis of the financials will help you figure out what the Revenues, Gross Margins, average expenses, and operating profit are. This is a great step forward because you want to be able quickly gauge if the business model works, and has worked consistently over the last few years. It’s at this point where a business buyer needs to truly evaluate the business model, its customers, employees, ROI, and industry research to take the deal to the next step.

Customers

Once we go through the financial information when buying a business, as business brokers the next step for us is to really understand who the business sells to. There are a few quick ways to get an in-depth understanding of this, and it all revolves around asking for different permutations and combinations of Revenue breakdowns. As Business Brokers we immediately as for revenues percentages from the top 10 customers (each year), recurring revenue percentages, sales/service contracts, B2B versus B2C. When buying a business coming out of Covid, I would look at how the business revenues were impacted during the pandemic, pre-pandemic revenue levels, and how the businesses customers were impacted by the pandemic.

Employees

We have said it time and time again, when evaluating a business for sale having the right people on the bus make or break a great business. Any business owner will tell you it can sometimes take just one bad apple to ruin things. When you are looking to buy a business owner retiring business in Canada; employees, and employee turnover forms one of the pillars when evaluating a deal. It’s also important to evaluate how involved the current owner is. If employees have stayed with the business for some time, that helps any buyer tremendously as there may not be a drop in service, or quality of work. Clients and suppliers may not be completely impacted as there may not be a change in who is servicing them, of course this is different for owner operator businesses. Lastly, there is a significant time/cost involved in hiring, training, and/or replacing employees, and it’s important to work that out in advance, and this is a great indicator if the business is geared for growth or not.

Return on Investment (ROI)

When evaluating a business to buy, some of the first questions we get asked is what the return on investment is. This is a bit of a tricky question and depends on a few quick factors. In its most simplistic way, business brokers can value a business based on multiple of cashflow. In a simple world a buyer evaluating a business for sale, would take a 3x Multiple as 33% ROI, 4x Multiple at 25% etc. That being said, it also depends heavily on the amount of cash a buyer is looking to inject, versus, seller financing and finally bank debt. In reality, if there is a higher portion of bank debt, a buyer should look at their weighted average cost of capital (WACC) and discount this from their ROI. Ultimately, your ROI will be based heavily on how quickly you can pay down all vendor note and debt, and are a beneficial owner to all of the businesses cashflows. The quicker this happens the higher is the ROI.

Future Potential

The final quick point to look into with a business for sale, is the businesses future potential. If the buyer is from the industry, this might be a very easy answer, if not, as business brokers, we ask some very quick questions to the business owner about how they would/have grow their business. In most situations it’s a combination of either new locations, vertically integrating competitors or horizontally integration. If it’s not obvious at the start, this might not be the business for you, and as business brokers we would request all buyers to think hard about how to grow the business. the quicker you can grow a business from the start, the higher is the ROI.

In conclusion, when looking at a business for sale, a good buyer should be able to evaluate these points quickly. When thinking about buying a business, it helps to think about your cash injection, and potential for bank financing and then backward calculate if the price range, potential growth and ROI are worth the effort. If you’re interested to connect with one of our M&A Advisors, Click Here and some one from our team will reach out within 24 hours.