You’ve wondered, right?
There are a lot of businesses out there that are successful, and they’re up for sale. It seems like an easy play. And, if the company has a great story behind it, that’s a sure thing, right?
Not so fast. It’s not that simple. It never is.
Don’t Make This Dumb Mistake That Everyone Else Does
Have you ever owned a business that didn’t generate any money? No, of course not. Because they don’t exist because a business that doesn’t make any money isn’t a business. It’s a charity case or about to go out of business.
That might sound harsh, but there are a lot of businesses out there with difficult-to-understand business models, cash flows that don’t make sense, and valuations that are hard to objectify. These businesses are for sale. Should you buy them?
No.
Don’t overcomplicate this. A business owner might pitch you on the business idea – that it’s really great – even when the fundamentals and balance sheets show the company is in the red. It might be the most compelling story you’ve ever heard. At the same time, the company is bust.
Would you buy a sick dog that couldn’t do anything but lay own and that was terminal and expensive to take care of?
Maybe you would if you’re a real animal lover. But, in business, it just doesn’t make any sense. That’s not to say you should strictly chase cash flow, but it should be near the top of the list of essentials.
Also, look for assets. What kind of equipment does the business own? Is there any cash reserve or retained earnings that the company can use for research and development or marketing? Are there any proprietary or secret formulas, patents, trademarks or any other assets that have either a cash value or intrinsic brand value?
Tips On Finding A Great Idea
Roughly 70 percent of buyers start their search online. There are an incredible number of businesses for sale out there. Which ones are worth looking at?
In general, you want to buy a business that’s easy to understand. The business owner should be able to explain what he or she does in one or two sentences. Secondly, look for future development. What has the company developed in the past, what has its research and development historically looked like, and how effective has that R&D department been, relative to the company’s size?
What’s the company’s profit margin? What is the strategy, if any, to continually make processes more efficient. Because inflation erodes profit margins, companies need an inflation hedging strategy. They need a way to reduce costs over the long-term.
Better companies have protocols or systems in place to handle this over time.
What’s the management’s relationship with its employees and vendors? Buying into an existing company means you’re buying the company’s culture – warts and all. If it has existing labor disputes or friction, that’s another problem you have to sort out to make the company viable long-term.
What’s its prospect for future business? Take Hudson Bearings, for example. It’s a company that was purchased by Jim Klingbeil Jr. and Donnie Bowman. The company is involved in Ball Casters (castor wheels using ball bearings), and various other ball-bearing related products.
Even before the company was sold, it had a reputation for producing high-quality ball bearings. But, its manufacturing process was showing its age. Fortunately, there was room for growth and development using CNC machinery. The business had a future. If the business you’re considering doesn’t have a future, don’t buy it.
Future prospects don’t include just future customers. It includes future products. So, if your prospective company made ball bearings, what can the company do with that product to keep it fresh and relevant? If you don’t know, and the business owner doesn’t either, that’s a bad sign.
How To Slash The Time Required To Find A Business
If you’re like most people, you’re busy. Too busy to peck and scratch your way through the mountains of terrible businesses out there for sale. You want the right one that’s profitable, has positive cash flow, and just needs some TLC.
So, what’s an aspiring entrepreneur to do?
Get a broker. Seriously.
An intermediary will dramatically reduce the amount of time wasted finding that perfect business. Keep in mind that sellers almost always pay brokers so you may be working against your best interest if you’re dealing with the seller’s agent. However, if you find your own broker, or someone willing to give you some advice in the buying process, you will:
- get access to a vast treasure trove of viable businesses
- have help throughout the buying process
- get honest business valuations
- have a deal that is constantly moving forward and not stalling
- have someone else to manage the legal documents for you
So, are you ready to take on the challenge? If so, good luck in your endeavor!