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BUYING A SMALL BUSINESS

Know What You're Getting Into

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Before you invest time or money in pursuing a company that's for sale, find out if the companyis really for sale. "Maybe the owner just put the business up for sale to test the market, so he or she could sleep better at night knowing that the business isworth a half million dollars," says Susan Pravda, a mergers-and-acquisitions specialist with the Boston law firm Varet Marcus & Fink. "Maybe familymembers or a spouse put him or her up to it, and when the business does not sell for the asking price, the owner can go back and say, 'See, I tried, but thereis no one willing to buy."

People who have put their businesses on the block sometimes end up discovering that they can actually make more money by keeping it than by selling it. If abusiness that's worth $650,000, for example, generates $200,000 a year in cash flow, the seller only has a short-term incentive to sell. That's especially thecase when potential buyers offer to pay only a portion of the purchase price in cash and the rest in deferred payments.

"The first question every buyer should ask is: Why is the owner selling the business?" says Pravda. If the seller doesn't have a definitive answer, you could be pursuing a false cause.

Last updated: Jan 1, 1995




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