How to buy a business the smart way
This article looks at the questions you should be asking yourself as you consider which business to buy.
How to buy a business - the smart way
There are three primary ways of becoming a business owner - starting a business, buying a franchise or buying a business from someone else. The majority of people go route 1 - start their own - but there can be many benefits in buying a going concern - provided you do it properly.
The biggest mistake many people make is to buy a business that is doing well. That may sound crazy but it’s true. If you buy a well-run, profitable business the chances are that you will pay over the odds for it and there will be little you can do to make it better. What you really want is a business on it’s last legs which has lots of potential to be turned around and then sold on (to someone who thinks that buying a well-run, profitable business is a good thing…!).
To avoid you being that person, here are a few questions you should be asking yourself as you investigate potential businesses.
Is it still going despite poor management?
This can make a business a good bargain because if it can survive when run badly then it can thrive if run well. Don’t think it will be an easy ride, though. You will probably have to sack most of the workforce or at least spend a lot of time getting rid of the bad habits and attitudes.
Does it have high cashflow and low asset value?
When turning a company around you need cashflow to keep everything going. If the business has a lot of its’ value caught up in assets then that’s not good as it just dams up all your money in stuff that you probably can't get rid of quickly - unless you sell it at a loss.
Is it a low tech, mainstream business or high tech and specialist?
You’re looking for the former - for a number of reasons. First, it’s easy to recruit personnel to work in the business and you have a bigger pool to chose from. Second, they will be cheap as they are generally unqualified - but easy to train as you require (compared with, for example, an engineer who is needed to run a machine). Third, the product will not need to be marketed strongly because people already know about it and buy it on a regular basis. Finally, make sure the product is durable and is not a passing fad.
How well (or badly) is the business being represented?
By represented I mean in two ways - marketing and physical. If the marketing is poor then the chances are that sales can be increased relatively easily with a bit of focused marketing. If the business is physically tired then again, a little bit of work can go a long way to improving profits.
How do you know if the marketing is poor? Ask a few key questions, such as what testing and measuring they do, what their return on investment is per marketing campaign and what their break even point is for each campaign. If they can’t tell you then the chances are they haven’t been doing it well.
Does the business have a manager (other than the owner)?
If the business doesn’t have a manager then all you are doing is buying yourself a job. If the business does have a manager then you need to look closely at them to see if they will be suitable to work for you. Then chances are they won’t be because they are probably too loyal to the previous owner, plus they haven’t been able to make the business work so far, so what will change when you buy it? Be prepared to have your own manager installed as part of the deal.
How much room is there for improvement?
This is really a culmination of all the other elements above factored in with the asking price or overall deal package. If you can’t see ways to make immediate improvements then the chances are you should walk away. Even if they’re asking a really stupid price. You need that business to be profitable within the first three months otherwise you’re in danger of going the same way as the previous owners.
Don't let your emotions drive you on this one; iI you don't trust your own judgement then make sure you have your accountant/attorney give their judgement too.
About the author
This article was written by Cornelius who is a business coach and business owner in his own right. He has been involved in improving small businesses for over 10 years and writes regularly on the subject. Other articles of interest to the small business owner can be found at his main site - www.smallbusinessbuddy.net