Buying a Business: 10-Point Checklist to Save Time and Money
Welcome to Your Financial Freedom
The decision to purchase a business is perhaps the most expensive one any person can make during their lifetime. You generally expect the acquisition of an existing business to far exceed what you might spend to buy a car, and possibly even a home. While your principal residence may be pricier than the actual cost of acquiring a company, the additional funds necessary to keep the business running and weather whatever rough times are thrown your way can eat up ten of thousands of additional dollars. With this kind of money at stake, doesn’t it make sense to save as much as possible?
Tips for Saving, and Savoring
No ten-point list can ever hope to supply you with every imaginable consideration when it comes to buying a business. While the Ten Commandments proved eminently satisfactory to the ancient Israelites, modern-day entrepreneurs must look far beyond the basic tenets to make all the appropriate decisions. Keeping that in mind, we all need a reference point from which to work. The following factors – listed in no particular order – should be a good jumping-off point, but feel free to expand on them and dig even deeper to decide that the business you plan to buy is right for you.
1. Consider the History – Plan For the Future
Every business owner has his or her own way of doing things. The price of the business you plan to buy is most likely based on historical factors – real estate prices, equipment and inventory value, and existing sales versus the cost of operation – but its true worth should instead be calculated on future potential earnings. Only when you understand what the business will provide can you comprehend whether it is a good buy today.
2. Look For a Solid Foundation
A business that has been shown to flourish despite past financial downturns is one worth considering. As the saying goes, “You can’t make a silk purse out of a sow’s ear.” This means that a weak company will hardly grow into a great one simply by making a few changes. With all the terrific opportunities out there, it hardly makes sense to buy a business simply because the price is right.
3. Acquire a Puzzle With All Pieces Intact, Or Readily Available
A company has a great product, but the store is in a bad neighborhood. A service-oriented business is foundering due to outdated equipment. If everything looks good but the previous owner simply didn’t have a clue how to pull it all together, or if only one element needs changing – moving to a better location, or upgrading the gear – there exists an opportunity to turn a great profit by doing everything better and making sound decisions.
4. Profit Versus Product
You have always wanted to operate a video game arcade, or a mattress store, or a gas station. And look – here’s one for sale in a part of town close to home. So what if the place hasn’t operated in the black for the past three years, or there is a huge competitor right down the street. Basing a buying decision solely on the product or service is a recipe for failure or, at least, infinite frustration. If you can make money by running the business, and the price you will pay appropriately relates to a decent return in a reasonable time frame, any other benefit is pure gravy.
5. Invest With Your Experience
The previous point aside, your success as a business owner will come much quicker if the skills and experience you already possess have value in the newly acquired company. Identify what it is that a new owner would need to bring to the table in order to take the company to a higher level. If those factors are part of your makeup, it could well be the right business for you.
6. Focus on Growth
Many high-tech start-ups failed during the Internet boom because business owners were so busy trying to raise capital that they had no time to make the company profitable. If the business you plan to buy may take every bit of your skill and effort to operate, you could be better off looking elsewhere. An owner’s role should involve expanding operations, improving the bottom line, and envisioning future growth. A company cannot move forward if the owner is constantly mired in day-to-day activities better left to subordinates.
7. Uncover Hidden Treasures
A thorough exploration of a company’s assets may well turn up profit opportunities previously unknown or unexploited by the seller. It might be a forgotten patent, a dormant trademark, or a supplier relationship that has gone sour. Examine every aspect of the business operation, and you may be in for a pleasant surprise.
8. Tell a Compelling Story
Another feature of the Internet boom was the “elevator pitch,” a process where the CEO of a company seeking capital needed to effectively tell the company’s story in the limited time it took to ride between floors of an office building. If the business you wish to buy has an easy story to relate – “we sell this at such-and-such a price, and we’re better than XYZ because…” – your success will be far easier to achieve. Too-long explanations and extended sales cycles can spell disaster under even the best of circumstances.
9. Know the Drawbacks
Any time you spend evaluating a business to buy should involve considering the negatives at least as much as the positives. If you know the problems ahead of time – slow deliveries from suppliers, ineffectual marketing campaigns, or a poor relationship with industry regulators – you will know what needs fixing from your first day in charge. Prioritize in advance, so you know what to address first.
10. Add It All Up
The seller has established a price for the business, a figure that includes both tangible (equipment, real estate, inventory) and intangible (good will, a client base, relationships with suppliers) assets. At this point you must ask yourself one simple question: “Based upon my cash outlay, will I turn a profit in a reasonable amount of time with a fair (but not excessive) effort?” Don’t be afraid to call in the experts on this one, including your banker, CPA, attorney, , or even a trusted friend. Set out the evidence and see what they think. Oftentimes an element has escaped you that could make the difference between success and failure. Don’t leave a huge decision like this to chance.