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Managing Your Expectations Of The Business When Buying a Company

Guest post by: Steve Skrlac

Article Overview: If you are a business buyer looking to acquire a small business, it is important to temper your expectations of the business your are considering.

Managing Your Expectations Of The Business When Buying a Company

If you are a business buyer looking to acquire a small business, it is important to temper your expectations of the business your are considering. The harsh reality is that many small businesses are not as organized or presented as well as larger, professionally run organizations. Some business buyers find that they get quite excited about an opportunity only to find considerable confusion during the due diligence process. The purpose of this article is to illustrate that although a company may have a bumpy due diligence or fact finding process, it does not necessarily mean it is a bad business to buy.

The definition of profit

Many people have a singular definition of what the word "profit" means. For most it means the money that is left over after all expenses have been paid. Although this is certainly true, in a small business scenario, more clarity is required. Many small business owners include their own salary into their definition of profit. Sometimes an owner and a spouse both work in a business and an owner may try to include both salaries into the "profit" number. Technically speaking, a "seller's discretionary profit" is usually defined by normalizing the earnings for only one owner though. Other owners put through significant personal expenses through a business in order to reduce their tax bill then must add back all of the non-business expense items to profit.

The point is that sometimes a greater deal of analysis is needed to truly define the economic profit of a business and a financial statement may only tell half the story without this analysis. Work with a professional accountant who has experience in business purchase & sales to guide you through this sometimes complicated process.

The goal of a small business financial statement

For some small business owners, the goal of their financial statement is to minimize their tax bill at the end of the year. Rightly or wrongly, this is a practice done by many owners. The goal of a publically traded company is to have financial statements that instill investor confidence and increase shareholder value. Again, work with a chartered accountant through this type of situation.

If you are the business seller, be upfront if you are the buyer

If you are on the other side of the table, as the business seller, the best advice you can take is to be upfront with the purchaser from the very beginning. Don't wait till after a conditional offer or letter of intent has been negotiated to disclose an important piece of information pertaining to the profitability or growth prospects of the business. The key is to manage the expectations of the buyer. Buyers do not like negative surprises throughout the deal and they can certainly damage the trust or goodwill that exists between the two parties. Honesty truly is the best policy.

Fundamentally, if you are a business buyer the key to remember is that the perfect business does not exist. Manage through your expectations and look to the business for what you can make it. Always work with your attorney and accountant before you commit to any purchase to get the best advice and to stay protected.

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Article Tags: business brokers, buying a business



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