Passion aside, what else should you look for when buying a business?
Happy Valentine’s Day! In keeping with the theme of today’s date, I thought it would be appropriate to talk not just about the passion and excitement we may have about a business opportunity, but also about the practical matters we might want to consider before jumping in feet first.
Just as in our personal relationships, experience teaches us that ‘dating’ or getting preliminary information about the opportunity to buy a business can give us clues about the potential of our future experience. We may want to rush in, but why disadvantage ourselves when investment of a little time to ask the right questions can give us a better chance of success?
1. How long has the current owner owned the business? As a rule of thumb, the longer the present owner has been involved in the business, the more likely he or she will have had sustained success. Most people just can’t afford to stay in business if they are not receiving an appropriate return on their investment i.e., making an appropriate profit.
2. Why is the owner selling?
If a business owner is in their mid-30s, has been running the operations for a several months and gives their reason for wanting to sell out as ‘a desire to spend more time on personal matters’, I would suggest taking pause. Asking and verifying the reason for sale can be a good indicator of seller motivation. This can help first with determination of whether or not a business is worth buying and then with determination of the appropriate approach to the negotiation process.
3. Are accurate financial and other operating records available?
The presence of financial records is a good initial indicator not just of how well the business may have done over the years, but also an indication of good governance and some level of management structure. A caveat to remember is that many successful business owners dislike administrative matters. In fact, in my professional capacity, I have encountered a number of successful businesses with records kept in the proverbial shoebox.
4. Do the records give a true reflection of what your experience will be?
Generally, the answer will be no! The question is how far are they likely to differ on the upside or downside from your expected experience? Even if we assume that the records give a fair and accurate perspective of past operating results (and this is a significant assumption), we should remember that financial records refer to history. There are no guarantees that results will or can be duplicated.
In addition, a number of adjustments may be needed. We may need to take into account non arms-length relationships, e.g., renting a warehouse from a family member or changing the owner-operator’s salary expense to adjust for the market cost of hiring a manage. We may need to adjust figures to reflect market rates e.g. changes in supplier prices or even in the price at which the business can sell its products and services. There may be ‘hidden’ obligations to be accounted for e.g. lease adjustments or employee redundancy obligations (as mentioned in a previous article). Here is where you may be able to benefit from professional assistance.
Purchasing a business, just like pursuing a romantic relationship, can be a frightening and at the same time exciting prospect. There are no guarantees, but the return on investment can be significant to say the least. After doing your research, you will come to a point where a decision must be made. In business as in love, however, there can be incredible benefits to making that ‘leap of faith’ with the correct partner.
Best of luck and again, happy Valentine’s Day!
Kumi Bradshaw CBA, BVAL is President of Firm Advisory Ltd. Firm Advisory Ltd. provides business valuation, business brokerage and advisory services to the local business community with the remit of “Helping you make better business value decisions”. Kumi can be reached via e-mail at kumi[AT]firmadvisory.com or by phone at 441-295-3301.