Take off your shoes. Go on! It’s time to step into someone else’s.
The buyer. Ruthless, clever, efficient, and thorough. At least, that’s how they may seem like when you first meet them. Let’s shatter that barrier of the unknown, and understand what areas you need to cover in order to put your business out to tender – it’s time to examine the behaviours and processes of ‘the buyer’.
Picture this, Mr or Mrs Buyer: you’ve found yourself in a position where you have a good amount of capital behind you, and you want to start running your own business.
You have two options.
The first is to start your own business from scratch – a cheaper, but slower and much riskier endeavour.
The second is to purchase an existing business and capitalise on its already established profitability and structure.
You opt for the one that is more likely to bring you a quick, consistent income. You opt to buy-in.
2. Who are you?
And so, Mr or Mrs Buyer, what are you looking for? Chances are, you’re after a business that:
- Is in an industry you’re very experienced with
- Is in a situation/environment that you find quite favourable economically
- Is the best performer around (i.e. the best deal you can find)
If you’re really clever, you will have also engaged an experienced broker to aid in the purchase of your business, because you know their commission will be well-offset by the difference in result.
3. Business, Business, Business
You’ve found a few businesses matching your very strict criteria. Now it’s time to get your hands dirty. You start looking into the financials, talking to the staff, talking to the seller and talking to the people outside of the business.
You have five simple questions that will make or break this business in your eyes:
- Are the reasons for selling favourable? You don’t want to buy a business that the seller is leaving because they’ve run it into the ground. If they’re selling because they’ve ‘made it’ on the other hand, you’ll consider buying it at whatever price they ask.
- Does the business have a good general presence? Annoyed suppliers, unmotivated staff, unhappy customer base – any of these things could break the business, or be enormous issues that you will have to fix when you take over.
- Does the business have control over their market position? If the business is a big player in the market space, you will have a terrific opportunity to adapt and grow the business. The alternative is to live in fear.
- Do the numbers balance? If the cost of labour and materials are preventing the business from running at a good margin of profit, you may want to look elsewhere. Sometimes, smart cost cutting can improve the bottom line without reducing the quality of services or products, but if the numbers don’t work, the business won’t either.
- Is the business well respected? A reputation is not something we can easily put a dollar value to, but buying into a business with a solid reputation with customers and suppliers sets you up with a great chance of success.
4. The Finishing Line
The business you’ve got your eye on has passed all of your tests with flying colours, but it’s not out of the woods yet. It’s time to dive deep into the business.
Here’s your last piece of homework:
- Check the cash flow, profit and loss statements and balance sheets of the business for at least the past three years. If the business is financially healthy, we’ll give it a tick.
- Come up with ideas on how to grow the business. If you can come up with a lucrative new product or service, or if you can see a change in processes that will that will greatly improve the bottom line, the business will be worth even more to you.
- Evaluate the intangible assets. Does the business have Intellectual Property? Does it have any trademarks or patents? These are all things without a fixed value, but can contribute greatly to the viability of the business.
Great job! You can get out of those shoes now.
And get excited! Right now you have one thing that many sellers don’t: insight into how the buyers actually think.
So print out this page, make some scribbles, and put plans into place that will greatly improve the value of your business as seen by prospective buyers. As part of that plan, engage an experienced Business Broker to help you get the most for your business.