Are you ready to move from manager to owner?
There is an old saying: "It is easier to sign the back of a check than it is to sign the front of a check."
To me it sums up the real decision to buy or not to buy. As a broker I have had clients wrestling with this issue, and signing the front of a check is not for everyone. When you sign the back of a check you are a manager working for someone else who takes the risks, whereas if you become the owner you are accepting the risks of failure or success, but you will proudly be signing the front of your checks.
I once spent three months on a possible sale doing unnecessary due diligence because the buyer failed to tell me his financial need was a guarantee of $600,000 a year. It was unnecessary because the financials presented showed $400,000 a year, and the three months of review showed and confirmed the $400,000. The business would never make his goal, so no sale.
Generally if a buyer specifies a firm "salary" amount, and they do not see ways to make provisions for the business income being lower, they are going to fail. That is not to say you should not verify and seek an amount similar to what you are accustomed to living on, but you may need to look at what could be cut to make up for any losses you might incur.
If you don't see opportunities for growth, and only see what the business is currently doing (i.e., it makes your "salary"), you may need to continue to sign the back of the check. Ownership is not for everyone – and successful managers do not always become successful owners.
Buying is difficult without putting the stress of providing a salary – especially if it never provided that salary to the previous owner. But I often talk with buyers who are looking "for a living" and believe a paper with owner cash flow of $25,000 a year will provide that. Usually in conversation we can determine that their living is $50,000 a year, so unless there are other expenses or staff reductions of at least $25,000 – or a clear vision of growth to provide that amount – the business will not provide the needed income.
If you are at the decision point, and the business you are considering does not provide the income you need, you should rethink the purchase. The best answer is often to move up to a higher volume property, one you will have to borrow money to purchase, but one where the business profits will cover the loan payment plus your salary needs (and sometimes more).
Another point: The cash flow of the business you purchase, less your needed income, less any loan payment should not equal "0." You need a margin for times when "I didn't see that coming." And do yourself a favor ... don't raise your standard of living until that reserve margin has existed for a year or more.
Lewis Floyd is a senior associate with WB Grimes & Company, with responsibility for the Southern states. He may be reached at (850) 532-9466 or firstname.lastname@example.org.