The prospect of buying a business is not for everyone. The process can seem very overwhelming and complex to the majority of people. Buying a business requires a significant amount of thought, risk assessment, and resources.
Buying a business is an exhaustive yet rewarding process. Avoid these common situations that can make buying a business more challenging than it needs to be.
When buying a business, one of the most valuable assets a business has in the buyer’s eye is equipment and resources. From a general point of view, a business valued at $500k with approximately $400k in machinery is worth more than a business valued at the same price, but with only $250k in machinery and other technology.
A situation that can make the buying process more challenging is an inaccurate business valuation on paper. Meaning when a business is valued at one price, with a value given for resources and equipment, that looks great on paper but does not actually sell at that value. In reality, those “valuable” resources are not providing results or benefiting the business at all. This business value is not as valuable in the buyer’s eyes as it is being portrayed by the seller on paper.
Make sure to gather as much information about the business you are interested in buying as possible. The more information you have on the business and it’s assets, the better you can distinguish its overall business value. In your eyes, as the buyer, compare it to its listed value before completing the purchase.
High customer concentration, when one singular customer is responsible for 50% of the businesses sales and revenue, is a red flag when buying a business. This would definitely make buying a business more challenging, as it won’t completely prevent a sale, but will most likely assure that there will be significant earnout in the deal structure.
It is very rare to find a seller that is okay with earnout in today’s buying market. This is because of the amount of risk that is involved with buying a business with earnout. If that one customer leaves and does not wish to buy from the business with a new owner and new management, the business will lose at least 50% of sales revenue. This decreases business value and income, precipitating a not-so-successful future for you and your new business.
It’s best to avoid buying a business that has a large portion of its revenue reliant on one customer remaining with the company for an extended period of time. This amount of risk is most often not worth the seller’s asking price, and the price point a buyer pays for this type of business is simply too high.
At Murphy Business, we understand how overwhelming and complicated buying or selling a business can seem. Finding the right business to buy or the right buyer to sell to is a lot of work. That’s where we come in. Our experienced team will help you find the right buyer for your business or the right business for your buck!
Contact us for more information and connect with an expert today!