Evaluating A Business
Do Your Homework
The best time to do your market research is in advance. Here are some key ideas to help you make the right choice before you invest in a product, a service or a business.
Bootstrap Your Way To Success
One of the best ways to build a business is to start off on a bootstrap. This means that you start off with very little money and you grow your business with the money that you earn in the business, rather than outside financing, borrowing, loans from friends and so on.
Ask The Right Questions
The first thing to do is to research all competitors for the product or service and ask this: “Why would someone switch to buy from me?” If there’s already a similar product or service in the market, why would someone leave a product or service that they’re comfortable with for your product or service that they don’t know anything about? Is your product or service better, or is your idea cheaper or of higher quality? And can you convince enough customers of this to stay in business?
Look For The Fatal Flaw
The second way to do fast, cheap market research is to be suspicious. Be wary. Develop a cynical, pessimistic attitude and accept nothing on faith. Look for the fatal flaw. Whenever I’ve done consulting for a corporation, especially when they’ve asked me to research an investment, I always look for the fatal flaw. I always look for the one thing that’s wrong with this investment that could cost my client a lot of money. And do you know something? In 99 out of 100 cases, I find the fatal flaw. I find something in a contract or a mortgage agreement or something in the way the land is laid out or the way the distribution arrangements are designed.
Find Out Why It’s For Sale
I often find something that is fatal, something that if it were not caught, would lead to the failure of the business. When you’re thinking of getting into somebody else’s business or if somebody else is trying to sell you an existing business, look for the reason. There’s always a fatal flaw when someone is trying to sell you a successful money-making opportunity. If you can’t find the fatal flaw, only then should you go ahead with it.
Don’t Lose Money
The third thing that you can do when considering a business that is for sale is find out why it’s being sold. Very few people will try to sell you a successful business. Usually people who are selling a business are selling it because they’re losing money on it. Many people say they’re selling a business because they want to concentrate on something else. No. The reason they’re selling the business is that they’re losing money on it. And you must find out why a person would sell a successful business.
Think Long Term
Finally, number four, look at the business before you go into it as though you were going to be in it for 20 years. The long-term perspective sharpens short-term decision-making. If you look at any business venture, any product or service, as though you were going to be doing this 20 years from now, you’ll find that you’ll make much better decisions.
Action Exercises
Here are two things you can do immediately to put these ideas into action.
First, look for the fatal flaw in any investment that someone tells you is a good idea. Look for a critical weakness that could cause the business to fail.
Second, think about being in this business, or selling this product or service, for the next 20 years. When you think long-term about business decisions, you make much better decisions in the short-term.
10/28/08 at 05:10 AM
I disagree that people sell a business beacuse they are losing money most of the time. I am a full time business broker, and I have numerous outstanding listings that are profitable. Oftentimes my sellers are retiring, reloacting, or ill.
10/28/08 at 06:10 AM
I agree a buyer must determine reason for sale, but why would you advise anyone that the ONLY reason a business is for sale is because it is losing money? Business owners sell successful businesses everyday. Retirement, divorce, partnership disputes, relocation. If you are going to give advice, I suggest you be accurate.
10/28/08 at 06:10 AM
As a practicing business broker, I find your article interesting and informative. However, you give the impression that there must be something wrong with every business being sold or why would an owner want to sell it? Well, I disagree. There are legitimate reasons for selling such as retirement, illness, family issues, personal issues, etc. As long as the business is functioning well and is profitable, there is no reason not be buy a business as long as a thorough due diligence is performed. Most of my clients who have purchased a business are doing quite well. The ones that are not were not operating the business like it should have been.
10/29/08 at 09:10 AM
Most businesses are sold for personal reasons – not because the business is losing money. Most business brokers will only take on clients where the sale results in a win / win outcome. Most business brokers mentor and protect their clients to ensure the best possible outcome. The author obviously does not have experience in our profession and should stick to what they know rather than posturizing and providing misleading information. I have 31 business brokerage offices accross Canada and in all of the hundreds of sales we have done we have only 3 that did not work out well for the buyer. These were the result of extenal happenings eg. Big box store competing with little store opens down the street or government changes the rules of the game.
Greg Kells
President, Sunbelt Business Brokers
10/30/08 at 08:10 AM
I agree with Greg, that businesses sell for many reasons. Also, a business losing money for a seller may be a good deal a buyer. Example, I have seen Subway restaurants that have had good sales but lost money or did not generate the profits they should have generated because the owner did not control the food or labor costs. Another experienced Subway owner will buy up such a store at a bargain, fix the food and labor cost problems, and make it a successful business. In fact, this happens often in the restaurant business.
The author is correct that many businesses are not profitable or marginally profitable, and some businesses can’t be sold. We know through the IBBA that only a small number of businesses on the market actually sell (about 10.5%). The main reason businesses do not sell is they are overpriced, and often by a great deal. Another significant reason is that they have no substantial business records to prove what their real sales revenues and earning. I blame much of the pricing problem on untrained business brokers and accountants. Having poor accounting practices is a seller problem.
Good businesses with good finacial records sell at a premuim. If they will qualify for an SBA loan (USA only), they are the best businesses to buy and least risk to a buyer. If they have no books, they are the highest risk. A buyer should always remember, buying a business is an investment, and investments should yield a return. The lower the risk, the lower the return, the higher the price. The higher the risk, the higher the return, the lower the price!
Lou Vescio, CBI, M&AMI
Sunbelt Business Brokers of Melbourne, FL
04/01/09 at 02:04 PM
The above business brokers make the most sense in their analysis. Many people go into business for the wrong reasons to begin with. Fall in love with the product, not what it can do for you. Sometimes what is good for you could be your neighbor’s worst nightmare. Make sure you do your homework on ROI. Make it a calculated risk, not a rash decision. You better have some ramp-up money too. Being undercaptialized is always a problem – not a good idea to boot-strap if it leaves you with sleepless nights.
04/01/09 at 02:04 PM
Tracy is way off track. His diatribe smells of sour grapes. CASH FLOW IS KING and businesses that are losing money rarely sell, except for cents on the dollar. I have been selling businesses for 15 years and have had many repeat sales.
2008 is proving to be a great year!
What Tracy should under stand is: The Success of the Seller does not translate to Success for the Buyer. A buyer must not only look long and hard at the business but also long and hard in the mirror. People all have a fatal flaw. It is part of life.
04/03/09 at 04:04 AM
I am very excited to have the opportunity to read some of your articles. Have been so helpful,and the most important of all is that through reading your articles, I have my feet on the ground in terms of moving my business and my carreer forward. Thanks for your good work.