Many owners decide to sell their business because it is already worth a sizable amount of money. Obviously, buyers will only look for business that can generate enough profit. It should be noted that the value of equipments, fixtures, furniture, unsold products and other assets should warrant a reasonable price. In fact, it is still a good idea to purchase businesses that don’t provide enough profitability in previous months.
Many companies could have net losses, but after further analysis we could see that much of the profit is diverted for debt payments and other things.
Here are six expenses that can be adjusted to achieve profitability:
1. Owners’ salaries:
Many business owners take a significant amount of money each as their salary. New buyers of the business could reduce or even eliminate owner’s salary if they already have other sources of income. Buyers could already have their own parent business that can provide more than enough personal income. By eliminating owner’s salary it is possible for the newly-acquired business to have healthier finances.
2. Car expenses:
Many businesses operate cars for office-related tasks. In some cases, it is possible to sell some of the cars to reduce overhead. Office could also organize staffs that need to use the company’s car and if possible tell them to use the same car to save fuel costs.
3. Staff benefits:
Life and health insurance could be charged to business as a benefit to staff. New owners could make adjustments to reduce insurance expenses without affecting coverage.
4. Debt payments:
New business can negotiate with lender to get lower interest rate. Some of debts could be associated with the earlier owner, so, this shouldn’t be an expense to the buyer.
5. Amortization and depreciation:
It is possible to sell equipments and purchase new ones with slower rate of amortization and depreciation.
6. Legal fees:
Previous business owners could incur legal fees for specific tasks. This could be considered as non-recurring expenses.
So, buyers who think about acquiring new business could turn net losses into net profit without making significant changes. By just making simple analysis, it is possible to find out that the bottom line is actually bigger that we thought. Also, the new owner could have new resources that allow the business to offer products with better price/value ratio.
Unfortunately in some cases, these simple changes may not be enough to ensure net profit. The company could actually have more serious problems that we thought. It could be necessary to make some more drastic changes that can affect existing staff. As an example, it could be necessary to close some unprofitable branches and cut jobs. It may also be necessary to reduce the production and focus on selling goods stored in warehouse.
To avoid such a situation, buyers should still be accompanied by reputable and professional consultants that can provide advices on real value of a company. However, big corporate regularly purchase financially ailing small companies, because they need to acquire some of the unique, proprietary technology.
The Author’s hobbies includes playing football, video games and learning small business seo services tips and tricks.