Mistake #3 - Not Asking Right Questions
Something changed in your life and you decided to own a business. You could probably start from scratch, but considering all pros and cons decided to acquire an established business. Well, it's a very wise decision as long as you do it right. Unfortunately, new business buyers make many mistakes that make business acquisition much harder, some times causing substantial financial and emotional hardship, other times loss of otherwise promising business opportunity altogether.
Let's review 10 major mistakes that business buyers make that prevent them from successfully buying a business.
- Mistake #1 - Procrastination
- Mistake #2 - Making Assumptions
- Mistake #3 - Not Asking Right Questions
- Mistake #4 - Being Overly Aggressive
- Mistake #5 - Falling In Love With A Business
- Mistake #6 - Not Being Able To Compare Businesse
- Mistake #7 - Not Using Intermediary For Negotiation
- Mistake #8 - Forming Partnership Without Proper Documentation
- Mistake #9 - Allowing Counselors Making Buying Decision
- Mistake #10 - Relying Too Much On Financial Documentation
Mistake #3 - Not Asking Right Questions
This is the most common mistake. Can you blame a buyer if he never bought a business before and never owned one either. Not asking right questions may lead to missing on a perfectly good opportunity that doesn't come too often, or, what even worse, buying a wrong business and lose money, time and self-confidence. So, what are the right questions to ask? Lets take a look.
Your initial set of questions should be qualifying questions, addressing two major concerns:
- Is this a good solid business with potential to prosper and continue growing after transfer of ownership?
- Is this the right business for me?
Qualifying Prospect Business
Buying a business should always start with a little research. You'd be surprised how much time people spend on researching new cell phone for $500, and how little time they spend researching a business for $500,000.
- Start with reviewing the financials: profit and loss statements (P&L) and balance sheets for the last 3 years. Financial statements will tell you a lot about the business and its health. Research trends in both income and expenses, going category by category. Ask the seller or his agent about inconsistencies. Cash flow is blood of a business and P&L Statements are like blood tests. Balance sheets will tell you a story about assets and liabilities, which may or may not be of great importance depending how you structure a deal.
- While reviewing the financials, pay great attention to margins, e.g. gross margin, net margin and margins for each major expense category. Compare the margins to industry average numbers. You don't want to buy a business that spends twice as much on payroll comparing to other similar businesses.
- Rent is one of the major expenses, especially for service businesses. For start-ups and businesses that were in existence for less than three years, rent is crucially important factor. For example, small restaurant with rent greater than 10% of sales has very low chance to survive.
- Check out the location. Are there many vacancies in the shopping center? What is your store visibility? Do they have large anchor store? Drive around the neighborhood and look for competition. How many competitors are there? How far are they? Try to talk to one of the competitors about their business. You will learn a lot.
- Do some internet research about the industry and growth forecast. Be prepared to spend a few bucks on industry report prepared by one of marketing research firms.
Is This Business Righ For Me
Regardless how good any business can be, if you're not going to enjoy running it, maybe it's not for you. Remember, it may be required to put in long hours, and it will be very hard if it's not your "cup of tea". If you're customer service oriented person than running a retail business and working with customers face to face may be a good choice. However, if you disagree with "customer is always right" notion, than, possibly, dealing with customers isn't the best idea. If you're a mom looking after a little kid, and can't put 8-10 straight hours in the business, internet business with flexible hours might be a good choice.
Before moving forward, put yourself in the owner's shoes and make sure they fit well. Such role-playing will help you a lot.