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Should You Knowingly Overpay For A Small Business Purchase?


Should You Knowingly Overpay For A Business

I remember growing up hearing from sellers the following sales pitch for why I should pay them top dollar. "You can get fresh oats for a fair price or you can get oats that have gone through the cow for a lot cheaper." The other one I heard was "Quality remains long after price is forgotten."

After 20 years of being a business broker, I have heard every justification in the world for why this owner's business is special and deserve a price at top market.

The difficulty for a buyer is two fold. The asking prices are presupposing that the report sales and profit are applicable for this time frame, not the civil war. Ninety percent of the time the profit is a lie, which makes the asking price unimportant. For the remaining ten percent, where the profit and sales figures are accurate and based on the current month's numbers, the profit level becomes critical.

If it is a small profit, and only affords the owner a low wage, it is stupid to pay too much just for a job. If the profit is substantial and more then the buyer needs, it might actually make sense to pay top dollar or even more. .

The reason is that in this economic climate, the numbers of businesses making a desirable profit are so small that if you can find one of those "keepers" it is worth paying a premium to get it. If you over pay at least the business profit can support the extra cost and when all the loans are paid off the price will be forgotten.

Of course, if you are lied to about the numbers, then any price you pay is too much. The reason the sellers lie is because they know that if they told you the truth you would not buy the business at any price or at a price so low the seller figures he might as well just keep it.

So first make sure you have the business reviewed in and out and upside down. Put it through the audit from hell, and if it still looks after that, you may have found a diamond. In those rare cases, consider paying what you must, in order to not let that good one, get away.

Willard MichlinAbout The Author:  Willard Michlin, CPA (106752) offers business buyers Due Diligence Services (Second Opinion, Offer Assistance, Final Due Diligence) when they are thinking of making an offer on a business or in the process of investigating a business purchase. Serving all of Southern California. He has written numerous articles on the due diligence process and can be reached direct at 805-428-2063 for more information and an appointment.


Categories: BizBen Blog Contributor, Business Valuation Issues, Deal And Escrow Issues, How To Buy A Business, How To Sell A Business


Comments Regarding This Blog Post


Business buyers, particularly first-timers, need to make a very important distinction between what they are paying themselves to run the business, and what profit they will derive from the business after paying themselves a reasonable salary. Often, business buyers delude themselves by looking at the "bottom line" but not taking into consideration how much of their personal time will be spent running and growing the business.

And the important question about business valuation is that it is highly personal and unique. The correct question is: "What is this business worth TO ME?"

After carefully analyzing the business, burdened by an appropriate salary paid to the new owner (based on the market for the position, NOT based on what the buyer "needs" to be paid) and finding a profit that justifies the price, the buyer can prudently determine that he is not "overpaying." It doesn't really matter if the price is right for some abstract "other buyer" -- it matters that the price is right for the particular buyer.


  Helpful Resources To Assist In Selling And Buying California Businesses
Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Mike Hurrell, Broker: Coin & Card Laundry Specialist Brokerage

Providencia Properties Inc in association with Golden State Laundry Systems is a full service Coin Laundry Real Estate Broker. At GSLS you will receive personalized attention from our professional staff of coin laundry experts. To sell or buy a Southern CA laundromat call Mike at 310-223-2240 X209.

Joanne Weber, Broker - Preschool Specialist - Southern California

The Ryan Craig Company is in its 35th year as the recognized expert in Southern California, dealing exclusively in the sale of preschools, Montessori schools, day care centers, and private schools. Our extensive list of references speaks for itself. Phone Joanne at 818-760-3684 for more info.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Rick Carlson, Business Broker - Southern California

You Will Never Feel Lost In The Shuffle. Many Brokers Simply Send Out An NDA And That's The End Of Communication. All Buyers Receive A Personal Meeting With An Ace Acquisition Specialist So They Can Recommend The Perfect Business For You. Phone Rick direct at 800-985-4939.


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Southern California Legal Services For Buyers And Sellers
Escrow Services From Helen Yoo New Century Escrow
Willard Michlin Due Diligence Services
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