What Key Aspects Should a Buyer Evaluate When Acquiring a Business?
I have worked with well over 1,000 prospective buyers looking to purchase a business over the past 15 years and I would estimate that probably 80% to 90% do not have a particular business category in mind. I can also say that may who have called my office inquiring about a specific business often end up buying something very different from what they had initially called on. A common question I get is what is a good business to buy? While I do have preferences for specific types of businesses, the better question is what are the key aspects I should evaluate in determining which business to buy? Here would be my top 5 factors a buyer should evaluate to narrow down the options and help determine which business is the best fit for them.
Do I have any related experience I can leverage into this business?
When the economy went south in late 2008, many buyers who had used SBA loans to purchase a business had defaulted on their loans. The SBA evaluated this and determined that one of the key factors why new business owners were not able to successfully operate their business during these difficult times was due to a lack of related experience in the business they had acquired. I am not contending that you must have direct experience in the business you are buying. However, I do recommend that your experience, whether it be managing people, sales or technical experience can be leveraged in the business you are considering.
Can I see myself coming to work each day?
For some, buying a business is merely the solution to one goal, to make money. For others, the goal of acquiring a business is to fulfill a void they are not currently getting in their current career or business. I call this the “passion factor”. The answer as to which one best describes you is a personal decision and one you should consider prior to moving forward. If you are the later, write down those things you love to do and see if it is realistic to start or acquire a business which is aligned with your passion. The passion does not only need to relate to the product or service the business is producing. Some of my most successful clients have been those who get the thrill from acquiring a solid businesses and grow it into something great.
What is the nature of the revenue?
This question refers whether the business model is one with recurring revenue or not. I encourage my clients to consider recurring revenue businesses as it is much easier to sell once and to have sale continue to come in on a monthly or periodic basis versus generating a one-time sale and then moving onto the next. I contend recurring revenue businesses have significantly greater value than those which do not. Take a commercial landscape business for example. Would you rather own a landscape construction business where you need to bid on each project, complete the project and move onto the next or would you rather own a commercial landscape maintenance business where you have recurring weekly accounts providing a much more predictable and stable source of revenue. While the landscape construction business could be more interesting and creative, it has significantly less value than a maintenance business as it is much more subject to risks associated with a down economy.
Can the business continue successfully without the current owner’s involvement?
Once the new owner takes over the business, it is important to ensure that the operations and sales will continue as usual. Therefore, it is critical to identify if the goodwill is tied to the business and its brand and not to the previous owner personally. For example, a buyer should be cautious if the seller had personally maintained all the key relationships with customers. If this is the case, once the seller exits the business it is possible that the majority of goodwill exits with him. It is important to look for business which have capable and well trained employees, systems in place and a smooth transition plan to ensure that there will be no disruption to the service or relationships the business has with its customer.
Are there things which I can do to grow business?
I have found that most buyers looking to acquire a business have a common goal of growing the business. The key is to determine where you should put your efforts to achieve the greatest results with the lowest amount of risk. It is important to perform proper due diligence on the business which will provide an opportunity to evaluate past performance and marketing efforts which should provide valuable insight in regards to what has worked and what has not worked. For some businesses, it’s a complete lack of marketing by the owner. For others, there is a flaw in the product or service being providers. I have also found that some business owners keep their business too long. They have either got burned out or have held onto their business for too long which often results in a drop in revenue and/or profitability. I believe these provide a great opportunity for a buyer as long as the customer relationships are not damaged beyond repair.
Buying a business can be a very rewarding yet scary process. The key is to focus on the right factors to increase your chances for success while reducing your risks. I recommend you start by generating a list of criteria which contains the keys attributes and questions which you can use as a guideline in evaluating different businesses to buy. Next, spend the time and retain the necessary advisors to assist you with due diligence. Once you find a good business, you should be in a position to move quickly as the good businesses tend to sale fast.
