4 Tips You Must Know Before Buying A Business
The sale of a business is similar to the sale of a stock certificate. The buyer is more optimistic about the future than the seller. The moral to this situation is that you may ask sellers the reasons why they want to sell, but perform a thorough investigation of the business, its market, and other related factors to be sure you are not about to buy a lemon. Also, if it seems to be too good a deal to be true, it probably is a deal you should pass up. Occasionally a business can be bought for a fraction of its worth because of a death or illness, but these situations are rare. When a business is for sale because of illness or death, realize that troubled businesses frequently contribute to health problems. Make sure the business you buy won’t put you in the same predicament within a couple of years.
There are at least four other rules of thumb to keep in mind when you consider buying a business. First, you should develop a “target business profile.” Before you go looking for a business to buy, you should have a specific set of criteria for what you expect. You need to identify how much you are willing to invest in a business, what level of risk you are willing to accept, what minimum return on investment you are willing to receive, and how much time you are willing to commit to learning and managing the business. Second, resist the temptation to buy the first business that looks good. Too often, people are so anxious to get into business that they buy the first one that comes along. This is particularly true if the business has considerable emotional appeal. If this happens to you, force yourself to step back and look at it objectively. Don’t let the seller play the car salesperson’s game of pressuring you to make an offer on the spot because someone else is also interested. Experience shows that people who maintain some objectivity and have patience find the right business. You should pursue buying a business with at least as much deliberation as a person would exercise when considering marrying someone. Emotions obviously will be a factor, but staying power should be a high priority.
The third rule of thumb applies to looking at businesses which have been around long enough to have a track record. Most businesses will not make a profit in their first year. If the business is not operating at least at its break-even level by the end of its second year, then it may never make a profit. Moreover, a business that does not have a positive cash-flow may need additional financing after you purchase it. A business with a positive cash-flow will help you meet the financial obligations incurred in buying it.
You should concentrate your attention on businesses that have been operating for at least two years. The fact that a business has its head above water after two years is no guarantee it will continue to be profitable, but you will be increasing your odds of buying a business with a future. Someone once said, “It may take two years to know if you have a lemon, but it takes an oyster seven years to produce a pearl.”
The fourth rule of thumb adopts the sky diver,s motto, “Don’t jump from the plane without a good parachute!” The same applies to buying a business. Make sure each business you consider buying can be sold if you find you were not meant to run a business or if you find it doesn’t have as rosy a future as you thought. Check to see how long that business has been for sale and what price or financing “adjustments” had to be made to induce you to buy it. Make sure you are buying a business with a future rather than getting stuck with a liability.