I received an email a couple of weeks ago for a local business that is for sale. The business has a good reputation and serves a pretty good market. For all purposes, it would seem worth investing in it, but I actually like the size of my business and am not interested in an acquisition. The idea of buying more market share always seems so appealing, though, because it's like buying more properties in Monopoly. The more you control, the more money you make, right? It's not that simple, although I do want to offer my take on valuating a business, even though I don't have a Harvard MBA.
I received an email a couple of weeks ago for a local business that is for sale. The business has a good reputation and serves a pretty good market. For all purposes, it would seem worth investing in it, but I actually like the size of my business and am not interested in an acquisition. The idea of buying more market share always seems so appealing, though, because it's like buying more properties in Monopoly. The more you control, the more money you make, right? It's not that simple, although I do want to offer my take on valuating a business, even though I don't have a Harvard MBA.
- How much guaranteed revenue does the business generate? This is a very big item that often gets overlooked because people get excited by buying the name of a business. The first thing worth asking for is a copy of business tax filings to be looked at by a trusted CPA or tax consultant. You want to buy a business that either is making a healthy profit, or has at least the potential to do so. There are a number of people who have made a really successful living buying mismanaged businesses and turning them into profitable businesses.
- How effective is the marketing of the business? This relates more to the potential of the business, the brand. A great brand has wide recognition beyond a referral base and also relies on good marketing for exposure. In the case of the business that contacted me, they were marketed decently-sort if-but they were really lacking in Web presence. The company has a website, but it is cobbled together. Because over 50% of our business is derived from the Internet, I would only be interested in buying a strong traffic generator that I can turn into profit.
- Are the equipment and procedures to your liking? What may seem trivial is, yet again, very important. If you have built your business around your preferred brand of sanding equipment and finishing procedures, then if you try to adopt a totally different system, you may run into more complications that you realized. If the company of interest has sanding equipment that is all beat up and worn out, you're headed for trouble.
- Are there any debts or any business liens? Debt can be hidden and profits inflated with just a few sleights of hand by a crafty bookkeeper or accountant-just think Enron. It's worth it to pull a report on the debts of the business and contact local distributors to verify the debts. While distributor debt is more apparent, there could be outstanding liens from bad workmanship on projects. I've seen companies fold and re-open under a new name several times just to hide their past.
The allure of more market share can make it easy to become impulsive and make a bad purchase. I know of a former employee who purchased a business locally that had been around for over 20 years. Even though they had been in business for that long, he told me he has only received a handful of phone calls from past client referrals. In addition, the business had only ONE job (that went poorly) on Angie's List, resulting in an F grade. That has kept them from being on the first page of all searches on Angie's List. Purchase wisely, folks.
