I think the United States has hit and moved from the bottom when it comes to it’s poor economic numbers.  Not only are several leading indicators up, I have noticed that in my law practice, there are increasing excitement in the local business community. It seems to be a good time, for many possible reasons, to start a new business or purchase an existing one.  I am seeing more investment in business, and more purchase transactions.  While we are obviously far from where we would like to be, things seem to be on the right track.

With this in mind, if you are considering investing in a new or exsisting business, here are some things to consider before signing on the dotted line.

Determining the Value of the Business. Because business brokers are valuing enterprises all the time, they’re likely to be better at it than someone like yourself who may buy only one business in the course of your career. But that doesn’t mean you can’t educate yourself in advance about ways of valuing a prospective purchase. Two Internet sites you can turn to for some rules of thumb are Bizcomps.com and BVMarketData.com.  Ask to see the seller’s tax returns, bank statements, accounting reports and any loan applications made by the business and it’s owners from the past couple of years.  An appraisal is nice to have done, but may be a bit conservative and expensive at the outset.  The best indicator (for most types of businesses) may be the recent track record — consider the actual revenues and expenses.

Look for seller financing. Banks often aren’t willing to make loans for the purchase of a business without a personal guarantee, which makes seller financing essential. Business brokers say that down payments of 30% or more are not uncommon. It’s usually a good sign when a seller is willing to finance the sale with a low down payment, as it indicates faith not only in their business but in your own prospects as the buyer of the business.

Remember that you’re buying a lifestyle and livelihood too. Business brokers point out that many buyers of small businesses aren’t just buying assets and inventories and leases.”You have to look at the fact that you’re buying a job and, hopefully, a decent return on investment,” says Glen J. Cooper, a certified business appraiser in Portland, Maine. “So part of what you’ll want to do is look at how much you can realistically expect the business to be able to pay you for your work, and also how much of a return on your investment you can get in the form of additional profit beyond your own compensation.”

Remember the business obligations of those brokering the sale. As in all transactions including the common real estate transaction, the broker works for one side, which is usual the seller.  Follow the money.  People are motivated in large part by how they are paid.  Even though the broker may be an honest person and answer all of your questions honestly, most of the time the broker works for the seller and not you. Money paid to your own personal lawyer and accountant is a bargain if it results in your getting a better deal, or steering your way from a lousy one all together.

Consider linking the final price to customer retention. With many service-related and other small businesses, a significant part of what you’re buying is the existing client base. With some business sales, the agreed-upon price is based on retaining customers, or a certain percentage of customers, over a period of time. Part of the sales agreement could include a drop in the price if the customer base declines after you take over.

Get the seller to continue for a while. In most cases, you should have the previous owner stay on during a transition period following any sale. This can be for as short as a couple of weeks or for several months.  It can aid in training of your new employees, learning processes, dealing with vendors and to smooth introductions to existing customers.

Purchase the good but not the bad. When purchasing an existing business, remember you are purchasing ALL of that business, both the good aspects and the bad.  There may be known or unknown legal claims (e.g. injuries, unpaid wages), unpaid vendor account, and taxes.  It is usually best to purchase the assets of the business only.

Given the economy, there may some very good deals out there making this the best of times to purchase a new business.  Be smart and careful, but do not let risk be the sole concern in whether you will be moving forward in your endeavors.

The foregoing was inspired by an article written by Joseph Anthony.