10 Tips On How To Buy An Undervalued Business
Buying a business is a huge step for any individual, whether he or she has bought businesses before or not. It is not as risky as setting up a new business because the name, product or service has already been established. In fact, buying a business can actually work well for someone looking to invest and take a step towards entrepreneurship.
Of course, much depends on why the business is being sold but if you do buy the right one then you could find yourself with a successful company on your hands, especially if you buy an undervalued business. This is a business that is currently making a profit but not necessarily doing as well as it should. There may be many reasons for this, which will be evident shortly, but that should not necessarily put you off purchasing the business.
Saving money by buying an undervalued business can give you a financial boost initially but much depends on why the business is undervalued as to how much of a bargain you are buying. The tips below will help you to put your mind at rest though by reassuring you that you are buying the right business.
The Buying Tips You Need To Know
- Shortlist undervalued businesses – When looking to buy an undervalued business, never settle for the first one you come across. That is effectively rushing into the purchase. Shortlist several that you may be interested in buying and are relevant to your skill set. Only decide upon the one you want to buy when you have carried out tips 2, 3, 4 and 5 for all of those on your shortlist.
- Ask why the business is for sale – All business owners should be extremely educated about their business and able to tell you exactly why their businesses are undervalued. It may be that they need a quick sale as a result of ill health. It may be that the business has stagnated and customers have lost interest. Whatever the reason, the owner should be completely honest and transparent.
- Examine the financial statements – This is self-explanatory. Every set of accounts for at least five years should be thoroughly examined and any holes in profits accounted for. If deficits are not accounted for or are present as a result of prolonged and unexplained poor business then walk away. An accountant would be the best person to advise you of the state of the accounts.
- Monitor the news – The news is useful when you buy an undervalued business because it will get you up to date with market trends that may affect your potential profits in the future. This applies to local, national and international news.
- Do your research – Research the local marketplace and the competition. Research the history of the business and the owner’s background. Ask the current staff for their opinions. Ask customers what they think. Leave no stone unturned when you buy an undervalued business because you will be surprised at just how much you can learn!
- Take charge of the purchase – Do not let anyone else, such as the current owner or a business broker, take over the purchase because you will find that you tend to lose control of the terms. Buying an undervalued business is a long process so keep yourself in the loop.
- Enlist the help of professionals – Accountants, lawyers and business brokers can be invaluable when buying an undervalued business. Legal jargon, financial issues and many other details can confuse you and are also easy to ignore so it is far better to be safe than sorry.
- Evaluate the marketing potential – What needs to be done to improve the business? What could be changed? How would you market it without alienating existing customers? All of this is worth bearing in mind because it will impact on your budget immediately after the sale has closed. In some cases, the cost for improvements may be included in the price of purchasing undervalued business. Take advantage of that.
- Compose a five-year business plan – Make the most of your professionals and plan ahead. You really should put this in place before the sale has closed. The business plan should incorporate everything you plan to do with the business over that period of time to improve business. Its very existence will also encourage you to stick with it.
- Enlist the help of the current owner – This applies to the transition and the actual sale. If an owner wants to see the undervalued business succeed and ensure that a quick sale occurs, then he or she will be willing to help out. This can typically be included in the purchase agreement so make sure it is.
02/04/09 at 03:02 PM
Speaking from over 47 years in business, serving on the SBA Board as well as being in business for myself as a Adverse Finance Consultant, a Mortgage Banker / Mortgage Broker, owning 2 Real Estate Firms, a PR company for 19 years, over 45 years as a Class “A” General Contractor in the State of Florida, although I have built in many other states as well as out of the country in Costa Rica and other locations, I was given advice when I was in a business relationship with a 72 year old Jewish Gentleman who told me, “If you have not learned anything else from me than this you will do well, never ask the advice from an attorney in any financial matters. You hire them to keep legal what you do and to take your orders, the same with CPAs.”
I have followed that advice for over 40 years and found it to be exactly true. You should also caution persons writing their own business plan as to make it realistic and to understand that it is only good for the person writing it, not for the bankers whom they may talk to.
First of all if they are JUST going into business for themselves there is no way for them to know what they are going to run into because as of yet they simply have not been there.
In over the 200 businesses that I have personally owned I have purposedly never started a business with more than $300 dollars in the bank. I have also never used any other funds to make that task lighter because I know that it does not give you a true picture of what is really happening with a business. With due diligence, desire and determination the business will succeed if it is going to. Having funds for a year or even 6 months in the bank lulls one to sleep and the effort is not put out to make the business run or die if it is not meant to be.
I have additionally arranged funding for over 3,600 different KINDS of businesses. In each scenario I have put myself in the place of the owner and tried to learn more about the business than even he knows. Only then can I represent him to a lender or become involved myself.
Many times I have gone back to the same lender that turned that individual down and arranged for a loan. In most instances single person owners do not realize that a banker wonders what will happen to the business if that person dies, gets killed, gets a divorce, etc. Obviously the business is gooing to go down the drain unless there is someone else who can step into his or her shoes and continue to run the business.
A contract with a manager with an excellent background in the SAME sort of a business, a KEYMAN INSURANCE POLICY that pays the bank in the event of that person’s demise. Playing God and expecting persons or bankers to back you does not work in most cases. In other cases the bank officer is usually sorry that he did not demand more in the way of protection.
All that takes is just a little thought.
Dr. W. Ronald Tucker, PhD BA
CEO / President
Feasible Concepts, Inc.
1-850-623-5999