BUYING A BUSINESS is a big step in anyone’s language. The excitement of the opportunity can often be tempered by the fear of the unknown.
Purchasing a business is much like running one: A big percentage of the process is about risk mitigation or minimizing. It’s important when purchasing that you work through a process of asking the key questions you need the answers to. Here are a few we consider to be crucial.
1. Why are they selling? Seller motivation is often a critical question in the buying process, particularly if they are claiming the business offers a great return with very little effort required.
2. How dependent are they on key customers? I’ve seen many businesses that rely on one or two key customers, and they have struggled heavily when those customers leave. Remember most stores operate with a profit margin of just 10-15 percent. A customer who can provide 10-20 percent of sales by themselves can lead to a serious decline in profitability should they leave. For jewelers, this may be insurance work or buying co-ops for which you are an approved vendor.
3. To what extent is the owner the whole business? Some businesses are little more than extensions of their owners. It’s important to assess the impact of them leaving. Do they have knowledge that can’t be replaced? Do they trade on a personal reputation that will be walking out the door when they go?
4. Have you reviewed the financials? Numbers can be overwhelming, but that’s no reason not to investigate them thoroughly. Sadly, I’ve known people who have purchased a business without sighting the financials and paid for that decision later. Bring in expertise to help you stress test the numbers.
5. What issues will you inherit? It’s important to recognize that you may be buying the bad with the good. Does the business have any outstanding legal issues or liabilities you may inherit? Are there unpaid bills you could be on the hook for?
6. Who is the competition? Growing the business will be dependent on you taking market share. It’s good to know who else is in your marketplace.
7. Are you dependent on key staff or vendors? In the same way that key customers are important, so too are key vendors and staff. Are you reliant on any one source? What would you do if they left?
8. What is the anticipated return on investment? This needs to be assessed both from the perspective of time invested and capital required.