A Buyer's Guide: Am I Buying The Right Business?
Many people assume that a buyer of a business knows exactly which type of business they want to buy but that is not always the case. Often times, a buyer has made the decision that they want to become their own boss without actually knowing which industry they will go in to. Even buyers who inquire about a specific business can end up buying something completely different. Here are some of the things you need to consider when evaluating what makes a company desirable:
Do you have the skill and knowledge to improve the business?
Whilst you may have found a business that you would like to own, a buyer has to be honest with themselves and realistically assess their abilities and experience when it comes to whether they could be a success.
There is of course the option to employ an experienced manager to control the day to day operations of a business if the seller is not willing to stay on in some capacity whilst you learn the ropes, but in an ideal world you would want to be able to have the required skills and knowledge needed from day one.
Not every buyer is going to be able to learn the intricacies of a complex, highly specialized industry if they don’t already have some experience and background, and so whilst it is possible to buy a business in an area that you have never worked in before, you need to make sure the barriers to entry are not so high as to significantly reduce your chances of success.
Do you have the financial resources to buy and run the business?
This is another key area where a buyer needs to have realistic expectations about their ability to finance the purchase and ongoing operations of the business. Making sure you have sufficient funds to allow for the working capital requirements of the business is a critical element often overlooked by first time buyers.
Even buyers who have working capital available need to be aware of the nature of the business they are buying – does it have slow receivables, or is it perhaps seasonal? Making sure you have excess working capital beyond the purchase price of the business is an essential way in which to minimize the risk involved in any deal.
Do you enjoy the industry?
For most entrepreneurs, owning a business means spending a considerable amount of time at work. Long hours, weekends, and limited downtime can be challenging and so it helps if you enjoy the industry you are working in.
This is not the case for everybody, and some owners will sacrifice enjoyment of the field they are in for considerable profits, or the chance to seize an opportunity in a growing industry that will likely lead to a high resale value in a few years’ time.
Enjoying your job makes the stressful times that little bit easier and so when looking for a business, why not start with something you have a genuine interest in?
Does the business generate enough income?
A buyer needs to ensure that they are buying a business for sound financial reasons, rather than emotional ones. There is little point in buying your ‘dream business’ if it is not going to generate enough income for you to not only survive, but to be able to grow in the future.
When it comes to the financials of the business a buyer should have a CPA review the numbers to make sure that the income produced will be sufficient in terms of what you require to meet both your personal and business needs.
Are the books and records verifiable?
This ties in to the above point when it comes to reviewing the financials of the business to make sure the decision you are making is the right one.
Good books and records are an indication of a well-run business and allow for a CPA to more easily verify the numbers. Businesses that have clear tax returns and P&L’s also give a buyer more options when it comes to financing the purchase should this be needed.
Conversely, even if the business is exactly what you think you are looking for, if the numbers cannot be easily verified and if the tax returns look in no way similar to the P&L’s you are being presented with, then the risks involved in proceeding will more than likely outweigh any perceived benefits of buying the business.
Is the price reasonable?
A good Business Broker can help you assess whether the price being asked for the business is reasonable.
An experienced Business Broker understands the market, has access to statistics on recent sales, can apply the various methodologies to guide you on an impartial basis to what is the most probable selling price, and can thereafter help you make an offer and negotiate terms.
Is the appearance of the business appealing?
This does not apply to every deal as not all businesses will have a physical location, but for those that do a buyer should pay particular attention to how well that location is looked after by the seller.
A location that the seller has not kept up to date, and that therefore has a high level of deferred maintenance, is likely to need more investment from the buyer and this cost needs to be taken into account with any offer that is made.
If the seller does not take pride in the appearance of their business then this could be an indication of how the business is run overall and so first impressions really do count.
Is the learning curve short?
As previously discussed, not every buyer will be going in to an industry they already know and so there will be an element of learning involved. However, it is important to make sure there is a short learning curve. Unless you have a consultancy agreement in place for the seller to remain with the business for a period of time after the sale, then once the agreed upon training period is over it will be down to you to run the business.
Learning from mistakes helps build experience, but these mistakes can be costly and to a small business can be the difference between success and failure.
Find a business that you can get to know quickly and you will greatly increase your chances of success.
For more information about buying a business call me on 407-989-6893 or visit www.theharrisongroupfl.com