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KNIGHT,
CO-FOUNDER OF NIKE
     
     
    You can also run your own “Wanted to Buy” ad describing what you are looking for.
    TAXING MATTERS
     
    Y ou are investigating a business you like, and the seller hands you income tax returns that show a $50,000 profit. “Of course,” he says with a wink and a nudge, “I really made $150,000.” What do you do?
     
     
    There may be perfectly legal reasons for the lower reported income. For instance, if the seller gave his nephew a nonessential job for $25,000 a year, you can just eliminate the job and keep the cash. Same goes for a fancy leased car. One-time costs of construction or equipment may have legitimately lowered net profits, too.
     
    What to watch for: a situation where a seller claims he or she made money but just didn’t report it to the IRS. If this happens, either walk away from the deal ... or make an offer based on the proven income.
    Remember, just because a business isn’t listed doesn’t mean it isn’t for sale. Talk to business owners in the industry; many of them might not have their businesses up for sale but would consider selling if you made them an offer. Put your networking abilities and business contacts to use, and you’re likely to hear of other businesses that might be good prospects.
    Contacting a business broker is another way to find businesses for sale. Most brokers are hired by sellers to find buyers and help negotiate deals. If you hire a broker, he or she will charge you a commission—typically 5 to 10 percent of the purchase price. The assistance brokers can offer, especially for first-time buyers, is often worth the cost. However, if you are really trying to save money, consider hiring a broker only when you are near the final negotiating phase. Brokers can offer assistance in several ways:
    • Prescreening businesses for you. Good brokers turn down many of the businesses they are asked to sell, either because the seller won’t provide full financial disclosure or because the business is overpriced. Going through a broker helps you avoid these bad risks.
    • Helping you pinpoint your interests. A good broker starts by finding out about your skills and interests, then helps you select the right business for you. With the help of a broker, you may discover that an industry you had never considered is the ideal one for you.
    • Negotiating. During the negotiating process is when brokers really earn their keep. They help both parties stay focused on the ultimate goal and smooth over problems.
    “Pretend that every
single person you meet
has a sign around his
or her neck that says
‘Make Me Feel
Important.’ Not only
will you succeed in
business, but you will
succeed in life.”
    -MARY KAY ASH, FOUNDER
OF MARY KAY COSMETICS
     
     
    • Assisting with paperwork. Brokers know the latest laws and regulations affecting everything from licenses and permits to financing and escrow. They also know the most efficient ways to cut through red tape, which can slash months off the purchase process. Working with a broker reduces the risk that you’ll neglect some crucial form, fee or step in the process.

A Closer Look
     
    Whether you use a broker or go it alone, you will definitely want to put together an “acquisition team”—your banker, accountant and attorney—to help you. (For more on choosing these advisors, see Chapter 11.) These advisors are essential to what is called “due diligence,” which means reviewing and verifying all the relevant information about the business you are considering. When due diligence is done, you will know just what you are buying and from whom.
    The preliminary analysis starts with some basic questions. Why is this business for sale? What is the general perception of the industry and the particular business, and what is the outlook for the future? Does—or can—the business control enough market share to stay profitable? Are the raw materials needed in abundant supply? How have the company’s product or