Buying a small business - how to assess?

[deekay]

I'm looking at buying a small business (very small) going for a few months online business.

This is my first such endeavour. I have found a prospect already, now how would i assess if it is a one that could potentially be valuable.

Would be great if peeps can point me in the direction of the kind of things to look for.
I know the owners are looking to sell. The have a reasonable turnover for their size. What should I request from them as part of due diligence.

 

[Bona Botse]

I'm looking at buying a small business (very small) going for a few months online business.

This is my first such endeavour. I have found a prospect already, now how would i assess if it is a one that could potentially be valuable.

Would be great if peeps can point me in the direction of the kind of things to look for.
I know the owners are looking to sell. The have a reasonable turnover for their size. What should I request from them as part of due diligence.

Start with audited financial statements for the past 3 years and all contracts that they have in place with clients. Why are they looking to sell?

 

[envo]

Start with audited financial statements for the past 3 years and all contracts that they have in place with clients. Why are they looking to sell?

He indicated that the business is online and only for a few months, so very much doubt there will be 3 years worth of financial statements and contracts.

Assessing the viability of an online business going forward, especially if the person wants to sell after only a few months, is difficult.

You need to check the Domain Authority, backlinks (to check if the owner spammed to get where he is in a few months to smear it off onto some unlucky person), what keywords are targeted and what the competition on those look like, where the site is ranked currently and what income has been declared. And of course, the most basic, is it indexed in Google and see the analytics data.

If all are above the board and there is some income declared (please verify this through a 3rd party if possible), you could make an offer. Just be careful though, normally you'd pay 12 x the monthly income. So if the monthly income is $10 currently because it's a new site/online business, then the most the owner should ask you is $120 unless there is some kind of circumstance where there is guaranteed income (which is rare)

 

[creeper]

Buying a business:

1. If there is any financial info, Discounted cash flow analysis. Is the company profitable and will it be profitable in the next 5 years. With this, analyse the current 'health' of the company as well.
2. Contracts / clients. If the company is based on strong client relationship, the clients may move with the person. (Normally there is a clause in the contract prohibiting the seller to steal clients)
3. Operations. One man job or is it well structured
4. Is there any legal issues that the company is involved in or may be.

But what you have stated, I wouldn't pay a lot. The company isn't established yet. There is no proven track record of profit or stability. Turnover iS NOT A GOOD MEASURE to calculate company value. It is just a big number that excludes the costs involved. There are other ratios (Net Profit) that takes this into account.

 

[deekay]

Excellent tips/advice. Thanks all. I need to ask some more questions and do some more research for sure.

 

[Stefanmuller]

Also ask yourself why someone would start up a company only to sell after a few months? Either he is trying to make a quick buck or he feels he can make more money elsewhere. Point is, he could have kept the business for himself and made a good return from it (which is what you hope to make) so you have to wonder why then sell?

Remember what happened with the Dotcom bubble in the US. People started startups and sold them for millions, only for the company to never take off.

Unless you are very knowlegable in the field of this business, if I were you I would stay away. You get people who start excellent business with the sole purpose to be acquired by bigger companies or venture capitalists which eventually are great successes but then you need to be able to know the industry.

 

[HavocXphere]

What exactly in your mind are you buying here? A small online startup consists largely of hot air plus lots of future potential...if the person running it does a good job. Hot air isn't all that valuable and you're not buying the owner, so what are you buying?

Is there an established customer base? (3 months...). Or perhaps a well known online domain? (Again 3 months).

So regardless of how much money is involved I don't quite see the part where you get something of value.