Friday, March 14, 2014

"Should I Buy This Business?" - How To Know If You Should And How Much It's Really Worth

"I've seen a business that I can get for a good price and I wanted to know what you think.."

So came the request.

Now the business, as it turned out, was in another state. Nice part of the world. A shop only a few years old and the owner wanting to sell because of health issues in the family.

You've heard of that one, right?

"Do you have the full financials for the period they have been trading?" I asked.

"No, but they sound okay."

So here we have "a good price" and "okay financials" ... but no real data.

What followed was series of more questions with very few answers and none of them backed up with any evidence. But it was a good story and on the face of it you could see how picking up a newly established business with fit-out for less than half the price paid new for the equipment seemed like a deal.

When considering buying a new business there a lot of questions to be considered before embarking on the process of narrowing down the issues that will allow you to make a good decision.

Personal Issues When Buying A Business

Before any merit of a business is considered, we need to be clear on our purpose and intention for making that jump.  If we are to buy a business what business has the capacity to produce a return that we would be happy to achieve?  How much would we need to achieve to make it worth the risk and sweat and hard work that will surely go into it?  Are we skilled in this industry or are we completely green with no knowledge at all?  Is your temperament suited to working with the customers your business serves?

Importantly, can you afford to stop work and getting a paycheck and invest money into this venture for the first year, without taking money out of  business? Realistically, that might be what needs to happen.

Due Diligence - Your Job To Know The Real Position Of The Business You Want To Buy

Beyond your own suitability for owning a business is the question of whether you want to build a business from scratch, or buy one that's a going concern.

Either way you need to be able to know how to research the market where the business will be.  You must understand the competition it faces and the trends that will affect the longer term viability of the business. Anyone  trying to sell a Music CD store or video rental shop might find themselves hard-pressed to get a sale for it now.

What's the long term outlook for this industry?
Who's leading the market for this nationally?
Who owns the top position locally for this?
What can your business offer customers - that they want - that they can't get already?

Many owners of restaurants and retail stores complain about issues that the owners should have taken into account before they opened the door to a new business. The cost of doing business is an element that is crucial to understand.  Employee wages are just one element that is a factor you need to expect as an ongoing cost.  Wages are a cost but being cheap and exploiting people isn't necessarily going to give you value for money.  Those employees you hire can be a real asset to the business and done right can be instrumental to generate income for you too - not just cost money.

Cash-flow - The Ins and Outs

Yet it is money you have to find and is only one part of the costs for you to have calculated when it comes to determining your options regarding the financial stability of the business. Opening hours, pricing, realistic numbers of tables you can fill and meals out the door... all of these have implications.  If you are running an eatery: times of service, levels of return you can make during a sitting, selection of menu items, cost containment and minimal waste. All of these are factors that will have bearing on the ability of the business to perform at a level that is workable. How well your business is located, marketing plans, rent and operating costs - all of these are issues you need to have answers for in order to know if a business is worth buying or opening.

And you need real numbers - not just "sounds right" numbers you made up, or someone told you.

To test your business value now or check the value of a business you might want to buy, check out this great app to calculate the real value of that business.    This will help you find your way through the maze and has been designed by a certified business valuer,  and is easily accessed. (I respect their professional ability but have no vested interest).

 A 'Quick Business Appraisal' APP is currently available for IPads & IPhones.

An Android version is also available from Google Play:

As it turned out, the business that was being looked at we began with, was just sending up too many warning signals for it to be a good buy for the person who asked for help in assessing the deal. 

Thankfully, he wasn't made a fool of in that deal, but he'll know a lot more about what to ask for in future as he looks for a business to buy.  The right business, for the right reasons.  

Related business articles:

When it comes to starting a business - passion alone is not enough
How to tweak your business for more sales
How to step-up in you business for better results
Prepare now for that business you want to sell later
Make your five year plan for life goals and for your business vision

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