You’re thinking of buying a business, why?
Maybe you’ve heard that buying an existing business is the best investment you can make. Or maybe you’ve heard that owning a business can help you improve your life, help you get the things you’ve always wanted. Maybe you just want to be your own boss.
If you buy the right business in the right way all of these things are possible.
How do you know you’re looking at the right business?
Business Buying Fundamentals:
There are some basic business buying fundamentals that you can consider to help you decide if this is the right business for you.
Buying a Job or a Business,
It’s up to you and what you’re looking for. A lot of people will tell you to buy the business that is not going to turn into a job. But if the business is your passion then buying the business for the job might just be the perfect thing.
Examples of this might be a winery, or machine shop. In both of these you may keep the whole thing small and under your control. Just try and decide at the start if this is what you want.
Buy the business not the job. This is another focus, and it requires a different approach. The best way to look at this is to fall in love with the profit and not the product.
In this case you’re looking at how the business performs. Does it have the processes in place to allow day to day operations to go on without you becoming involved in the day to day decisions.
If the processes are there, are the people in place to keep it all running smoothly? Then do the financials support hiring new managers if that is what you have to do? The key idea is growth. Is this a business that you feel you can grow?
To really grow a business you need to be able to work on it instead of in it. When you buy a business for the product you are buying a job. When you buy it for the business and profit then you are buying it to be the owner and not the manager or operator.
Which way is better? It depends on what you want and what your skills are.
If you’ve never owned a business before, and you have a real passion for a product. Consider the first approach. This way may not bring in as much money, but you’ll still be your own boss, and in control.
Once you have the business you can always grow it, learn the skills you need. The other advantage is this type of business tends smaller and costs less.
The second perspective, to buy the business to work on instead of in, requires more management and leadership skills. You’ll need a good understanding of accounting, at least the basics. In general you’ll need to be able to go into this new business and be able to review it’s fundamentals like:
- Finance
- Operations
- Marketing
- Sales
- HR
You are looking for what the business does really well in each of these areas and where you can improve.
In general if you’re buying a business that has the processes and procedures in place to allow you to focus on growth then it will usually be larger, and more expensive.
Bad-Good-Great
When going through your list of possible businesses where you want to aim at is the good category. In general flags that help identify each are:
Bad flages are:
- A very low sales price,
- spikes in revenue with the highest revenue in the last year.
- A product that has loads of competition and no great way to protect your market position.
Good flags are:
- A price that is not too high and not too low.
- A product or service that has a strong competitive advantage but does not own the market.
- Solid steady revenue with a good growth trend, but not a decline in revenue.
Great flags are:
- A business that owns the market,
- Has revenue with a straight up growth line.
- Has all the equipment and processes to support all of this.
Good is where you want to be. This is where the best value is. Bad in most cases is just bad, you get it for less. But, like most things, you get what you pay for. Great just tends to be too expensive. This is where you want to be when it comes time to sell the business.
Past Present Future
No matter what type of business you’re looking at you need to evaluate the past, present and the future. This impacts if you should buy the business or not.
The past is presented to you in the financials that you’ll get as soon as you sign a Non Disclosure with brooker. This tells you how the business has performed, and usually you’ll get the last three years of statements.
The present How well is the business operating right now. You can get this from speaking with the current owner, visiting the business. You will need to evaluate how the business is currently running. You may spot some problems on your first visit, but you will really be looking at this in the due diligence period.
The future How will the business do going into the future. this perspective is going to be based on market research, how much you know about the product or services the business is selling, your competitors, and how much you can afford to spend on growth. The general rule of thumb is: the price you pay is based on the past performance, but you buy a company for its future.
Needs vs Skills
This is where you take stock of your skills and experience. How well do they match the needs of the business. Before starting this journey, take the time to review all of the skills and experience you have that would be relevant to owning any business. Then what skills/experience do you possess that are relevant to this business?
You’ll need to list all the required skills needed in the business you’re looking at. The closer the match the better, but if there are gaps it is not a show stopper. Just understand what you’ll need to do to close the gap and the time frame to do it, once you’ve purchased the business.
The Formula
What is the difference that makes this business work. Can you identify the formula for success that makes this business stand out from the competition. Does it have a unique product that is protected by patents/copyrights? Do they have processes in place to make them a low cost producer creating better margins? Do they have a great reputation, and solid word of mouth marketing? Location that just makes it work?
Try and identify what it is that gets this business sales and what keeps it getting sales. Document it and look at what can be done to improve the formula or even replicate the formula for growth.
To Grow or Not Grow
When you begin looking at businesses and speaking with owners, you’ll run across a number of them that will say, “I did not focus on growth because I was big enough. I did not want the additional hassels from getting bigger.”
For an owner to feel this way is not unusual and is most likely truthful. A lot of good businesses have struggled through the start up to the good business stage, and that by the way, is a steep climb. They are happy with steady revenue and some feeling that they have made it.
Just remember the saying if you’re not growing you’re dying. No matter what type of business you are buying.
Before you start and really get into it, try and identify a plan for growth. What are the ways you could grow this business and an estimate of how much it would cost. As you enter into the due diligence process be ready to modify and change your growth strategy as you learn more about the business. It may take a year of operations after you own the business to be able to solidify the plan and begin implementing it.
You should always be thinking about how to grow your business.
Your Team
Before getting serious about buying a business you are going to need a team of people that will help you through the business buying process. This team will include people that will help with:
- Financing multiple relationships with banks
- Accounting a person or persons that can help you review the financials, before you submit your letter of intent, the due diligence and what to do after purchase.
- Operations identify someone who can help you review the current operations and what you can do to improve them.
- Human resources, who can you use to make sure you have the right policies in place at the start.