Buying a business for sale is a multi-step process and each step is important. You should never think about proceeding to the next position until the preceding step is complete and whatever you do, don’t be tempted to short-cut ever. You can view any time spent in preparation and in the revelation of facts and figures about the business to be well spent and as such you will be ensuring that no horror stories come back to haunt you when you take over.

Before you even start to talk to a prospective seller, a great deal of information can be revealed. One of the most important questions you must ask yourself before you go forward is what kind of enthusiasm you possess for the type of business you have your eye on. Do you really want to be involved in that industry and does it represent an area that you truly want to be engrossed in? Unless you intend to be a completely “hands-off” owner and are therefore taking considerable additional steps to ensure your safety, it is far better for you to be involved in an industry that you have a good feeling for, if not a considerable level of enthusiasm.

When you are conducting your due diligence, make sure that you inspect all documentation:

* Financials: including profit and loss statements, balance sheets, reconciliation documents, payroll records, tax reports. Be wary if the seller says that there are a lot of “cash sales,” as unless these have been declared to the tax authorities, you cannot count them and they should be ignored.

* Employee records: including longevity, pay scales, behavior, and attendance.

* Licenses: including federal, state, city, county as appropriate, plus any certification licenses you must possess to operate the business. It would be in your best interests to look at records independently, certainly if you believe there may have been any problems in the past or possible discrepancies.

* Equipment records: including age, depreciation, maintenance, replacement cost, and any required inspections.

* Inventory records: including turnover, condition, and re-saleability.

* Supplier contracts: including portability, alternatives and goodwill.

* Property records: including rental agreements and portability – the latter element is of considerable importance.

When you have inspected all agreements, contracts, licenses and records, you may find they are in good order and will work for you and then need to turn to the question of setting a good value as you buy business assets. There are many different ways of looking at this. Here are some of the methods commonly used to calculate:

* Asset-based multipliers, where assets are totalled and value is determined.

* Rule of thumb – this is not a recommended approach, as industry benchmarks are used to determine value.

* Revenue-based multipliers, are where a percentage or a multiple of the monthly or annual revenue is used. Again not recommended.

* Cash flow multiplier, is where a business owner’s profit level is added to his or her salary and any other perks and certain expenses are deducted. This method is most commonly used to determine the value of a business.

Any number of documents and figures can be used by the owner to back up a claim and it is up to you to take these at their value and determine the appropriate conclusions. You need to look at the reputation and age of the business, what level of competition you may expect, the existing legal structure, quality and physical location of the premises and last but by no means least, the difficulty in obtaining a new lease. When looking at a business for sale, take everything into account as you determine whether you should buy a business like this.

Richard Parker is the author of the How to Buy a Good Business at a Great Price series. As President and founder of Diomo Corporation – The Business Buyer Resource Center, his materials, seminars and consulting have helped thousands of business buyers realize their dream to buy a business.