You have just bought a beverage vending machine from the manufacturer that cost you two thousand dollars. The next day a salesman arrives at your home claiming that he can find a location for the vending machine that will earn you two thousand dollars per month. But he wants you to give him five thousand dollars now for his efforts in advance. He is willing to give you a written guarantee that if at the end of six months you are not completely satisfied with the machines earnings your money will be fully refunded. No questions asked. That sounds like a good deal to an inexperienced person, but it is a scam.

Nobody including the salesman can predict what that vending machine will earn once it is on location. If he was sure that it would earn that much he would quit his job and go into the vending business himself. His guarantee is worthless because all companies that offer to find locations for vending machines have no assets. They thrive only on broken promises. At the end of six months when your machine is earning next to nothing the salesman and his company will be gone.

A golden rule to follow when buying a small business is never believe a seller when they speak about future earnings potential, because that is impossible to predict. If the seller believed the business had great earnings potential, the business would not be sold at the present time. But if you want to take a gamble hoping that the business you are buying has potential that is fine. Never pay the seller for earnings potential because it is an imaginary concept and it is worthless.

Before you buy a business have their books checked by a qualified accountant with experience in the type of business you are buying. You must be sure of what the earnings are because that is what you are paying for. Nothing else is more important. Be wary of being told that there is untaxed income from the business that the seller is hiding from the government. If you count on that to pay off your notes and it is not there you will go broke.

A person selling a business has a tremendous advantage over the buyer. The seller knows the business and believes he is making a wise move. The buyer knows only what he sees and most likely is overlooking the vulnerabilities of what is being bought. Even if the business is a sound one, and the price you are paying is too high, you have a big problem. If you can’t meet the notes the business will have to be returned to its former owner with you taking a big loss. Some owners are happy to see that happen because now they can look for another sucker.

Once you buy the business it is up to you to improve its earnings, because if you don’t the notes you are paying leaves you with very little. That means that you must be a better businessman than the former owner. If you are better, you have bought a good business.