Key Considerations

	Choose a business you have some knowledge and interest in, but be open to other opportunities. Experience shows that most buyers buy a different business than the one that originally brought them to the broker’s office. Most buyers have the ability to adapt to a range of businesses with which they have had exposure or experience—even to businesses they had not previously considered.
	Choose track record and potential over exact location. Sometimes buyers make the mistake of looking only in their own backyards. Most often, the best business will be a reasonable distance away. A proven track record, adequate cash flow, and good returns are more important than location.
	Don’t get “sticker shock”. Structuring a deal that is favorable to all parties is often more important than the asking price. Make an offer that’s reasonable, and see what the seller says.
	Expect to offer a fair price that works for all parties. A fair price for the buyer is one that offers at least three things: (1) a reasonable salary for the new owner, (2) a reasonable return on the buyer’s investment, and (3) the business’s ability to service the debt incurred with the purchase. The cash flows to the new owner should support at least these elements, or the deal may not have long-term viability. Generally, a fair price falls between one to three times the adjusted cash flow of the business.
	Expect to finance a substantial amount of the purchase. Typically, buyers pay around 30% down and finance the balance. Mercury Business Brokerage can help you secure SBA, asset, cash-flow, receivables, and equipment-based financing for a large part of the transaction. Usually, the seller finances a portion of the deal with a note that is for five or more years. A properly structured purchase should keep your total debt payments below 30% of your cash flow.

Terms of Purchase
The more favorable the terms are for the seller, the lower the price will usually be. On the other hand, the more favorable the terms are for the buyer, the higher price and more down payment the seller is likely to want. You will get the very best price for an all-cash deal (even though it may not be in your best interest). You’ll pay the most for a deal that has little or no down, because of the risks taken by the seller.

Tangible Assets
Such tangible assets as inventory, furniture, fixtures, equipment, and receivables are more easily financed than a company’s intangible assets. Thus, a business with more tangible assets can usually be purchased more easily with less down payment, allowing you to purchase more for your money.

Intangible Assets
Intangible assets like the length of time in business, an established customer base, training, non-compete agreements, exclusive markets, established suppliers, and expected growth potential all add significant value to the business. However, since such intangible assets are generally financed by the seller, they are difficult to finance.

Lease Agreement
The terms and transferability of the existing lease agreements can be a critical factor in purchasing a business. Favorable terms and an easy transfer increase the price of purchasing the business, whereas unfavorable terms and inability to transfer (or, worse, a requirement to move the business) greatly reduce the value and price of the business.

Quantity and Quality of the Income Stream
The key factors of sales, gross profit margins, cash flow, quality of records, and positive business trends all help support a higher price and a greater debt structure.

Risk Vs. Price
The great tradeoff in the purchase of a business is between risk and price. Higher risk for the buyer results in a lower price, and lower risk for the buyer results in a higher price. Unless you’re a professional buyer, you should pick a business somewhere in the middle of the risk-price tradeoff—a business that may have some problems you can solve but is not failing. Then you can make a difference and increase its value without taking undue risk.