dave says january / february 2025
14
Featuring the advice of personal finance expert and bestselling author Dave Ramsey , the Dave Says column is filled with timely , relevant questions and answers taken from actual letters and calls on Ramsey ’ s radio program , The Dave Ramsey Show .
SO , YOU WANT TO BUY A BUSINESS … Dave , It ’ s always been a dream of mine to buy and own a business . A few weeks ago , I was approached with an opportunity that could make this dream come true . How do I know if what I ’ m being offered is a good deal and if I ’ m ready for something like this ? -Lee
Lee , Buying a business can either be one of the greatest purchases of your life , or one of the biggest mistakes you ’ ve made . And I ’ m going to do my best to keep you from making a mistake .
I want you to think seriously about a few things and keep some questions in mind . Then , at the end , if you still think buying is a good idea by the end of this article , you might be in business .
Imagine waking up on a Monday morning one year from now . Are you still enthusiastic about this line of work ? Your vocation needs to be a vacation . Otherwise , running a business is too much work . If you ’ re only in it for the money , you ’ re setting yourself up for failure , because there isn ’ t enough money in the world to make you work as hard as you ’ ll have to work running a small business .
Think about spending some time around the business . Sit in there for a week to see how it operates , and learn all the ins and outs . Then , if you ’ re truly invested and passionate about this new business opportunity , move on to my next question — what ’ s the business worth ?
A business is only worth the income it creates . It doesn ’ t matter if it ’ s in a really great location , or if it ’ s a well-known brand name . Those things have no value if they ’ re not creating income , so figure out the net profit of this business .
Notice that I said net profit , not just sales . When determining the business ’ s worth , you need to focus on all three areas — gross revenue , expenses and the profit it generates as a result . Become an expert on the business ’ s financial performance . Ask to see their past three years of financial statements , so you know what you ’ d be getting yourself into . Once you ’ ve done that , ask what you ’ ll make on your money . You can make about 12 % with a good mutual fund , so if you ’ re going to take the risk of buying a small business , you ’ ll want to make at least 20 % on it .
Another number to look at is the book value . If you collected all the receivables , and you sold all the equipment and the inventory and closed the business , what would you have in your pocket ? That ’ s the book value . If the business currently has $ 40,000 in inventory , $ 30,000 worth of equipment and $ 30,000 in receivables , the book value of that business is worth $ 100,000 . Somewhere in between net profit and book value is a fair price . If the net profit of this business is $ 60,000 and they ’ re asking $ 185,000 for it , then that ’ s a pretty good buy . But you need to really get into their books and make sure their numbers are real .
And even if you ’ re great with numbers , it ’ s a good idea to find a financial expert to help you through this process . It ’ s an extra set of eyes to review and verify all the documents and give you an unbiased opinion on the deal .
Next , what are the costs of running the business ? As you ’ re researching what the business is worth , you ’ ll come across the costs of keeping the business running while you ’ re researching what the business is worth . But your homework doesn ’ t stop there .
Take time to really examine the business and understand everything that goes along with keeping it afloat . This includes employee payroll and benefits , insurance , taxes , contracts , inventory , leases , cash flow — and anything else that helps run the business . Take time to think about the future , too . Do you want to keep the business where it ’ s at , or grow it ? What are your five-year goals for this business ? Are there any expenses you may need to factor in to get there ?
Finally , what ’ s included ? When buying a business , you need to find out exactly what ’ s included in the asking price . How are they deciding the value of their business ? Does the price include current inventory ? Office equipment ? Furniture ? Get a list of everything that ’ s included from the seller and what kind of condition it ’ s in . And don ’ t just take their word for it . Go check out their stuff yourself . It ’ s also important to know all the baggage that might be included in this buy . Are there any debts or liens involved ? You don ’ t want to buy a business only to find out you bought someone else ’ s problems .
One of the best benefits of buying an established business is that customers are included . The business should come with at least something of a reputation ( hopefully a good one ) and customers already in place . But be aware , many sellers will try to exaggerate how much their reputation and customer base are worth in finding their selling price . That ’ s why studying their books and knowing their customer satisfaction is so important .
So , how ’ re you feeling about things now , Lee ?