Now on the cons, that information received could be false. They could be overstimulating their sales information, they could be having a lot of employees that maybe are getting paid cash. And you only find that out during the final due diligence. A lot of people are running businesses not in a professional manner throughout the United States. And that’s especially true for businesses for sale under $500,000. Where as opposed to being sold on a multiple of EBITda, essentially net profit, they will be sold on owners compensation.
What’s the owner making in salary dividends, is the owner’s wife getting money from the business owner, the health care insurance, that that helps the owners family, you know, the company car, there can be a lot of different expenses that are not going to be run through professionally managed business.
But a business for sale and especially in the less than $500,000 range, you’re going to have to do a lot of work with an accountant to really understand how much is the owner making at the end of the day. And then also, with buying a business, they can be pretty expensive.
Depending on the business, it can be anywhere from two to four to five times the owners compensation to give you perspective, for a few different industries like real estate, property management, insurance, accounting businesses that have a stable book of clients that you’re just expanding upon.
They don’t even trade on a multiple of owners compensation or ebit.net profit, they’re trading on a multiple revenues. It could be one to 1.5 times revenue, that it’s going to cost you to buy that existing business cut.