Wyoming Business Tips for Nov. 19

A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.

By Susan Jerke, regional director of the WSBDC Network

“I would like to purchase an existing business. Where should I start?” Stacy, Buffalo

The short answer is that buying or selling a business is all about relationships.

In a traditional real estate transaction, such as buying a home or a building, there is zero relationship between the buyer and the seller. The property speaks for itself, and the parties may never actually meet face to face. However, a business sale is all about building trust and establishing relationships.

If you have found a business that seems attractive, and the seller says it is profitable -- plus, if you have some experience in the industry -- where do you start? Obviously, the financial information is critical, and often we want to begin by seeing the bottom line and “running the numbers.” But, there is often a bit of reluctance on the part of the seller to initially disclose complete financial information, usually due to confidentiality issues.

The author of “The Guide to Buying a Small Business,” Ed Pendarvis, suggests that an alternative way to view a business opportunity is to begin by looking at the top line to determine how the business performs. Ask for gross sales -- total sales, before any deductions for expenses. Immediately make contact with the seller, meet face to face and begin the process of really understanding the business.

Is it a good fit for your family and lifestyle? Can you envision yourself working there every day, and even evenings and weekends? How much money does the owner really take out of the business? Is the seller making a living from the business?

Visit the business and see firsthand how it is run, the condition of the equipment and the general “feel” of the operation. Once you make that initial “date” with the business, is it still attractive and something you may be interested in?

If so, you can begin the negotiation process by making an offer -- in writing -- with earnest money, obtain financial statements and tax returns, then go through the books and perform your due diligence with a CPA. Moving forward with the sale should be contingent on everything matching what the seller represented initially. The WSBDC Network can help you determine a fair market value for the business, based on the financial information, once you have access to it.

What should you focus on as a buyer? Much of your focus should be on what improvements you can make to the business -- less on what the seller has done with the business. Of course, you will only want to pay for what the business is currently doing, but your final decision should be based on how you would make it better.

So, what’s the bottom line? The deal must work for both buyer and seller, and trust is the basis of the transaction. Certainly, the process is never exactly the same for every buyer or seller, so the WSBDC Network invites you to ask for assistance along the way.

A blog version of this article and an opportunity to post comments are available at www.wyomingsbdc.org/blog1/.

The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email wsbdc@uwyo.edu, or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.