Wow, what a conundrum, do I put tons of time in developing a business from scratch and face overwhelming odds at failure or do I buy someone else’s jewel of a business with tons of money.
It’s so nice to setup your own business based on your own dream with your own systems and with all your own peccadilloes. On the other hand you could buy a ready-made business already making money and have a better than average chance at success.
Or do you?
All things being equal, we can assume the latter choice, that of buying a business, is a well run business, generating good revenues and is a sure bet. Now take away the all things being equal notion. You could be buying the proverbial pig in a poke, in other words a bad business that will drown you in a sea of someone else’s problems.
My bet is your dream, albeit, tougher to produce is a better choice under most situations. Remember that the business you are contemplating buying was someone else’s dream business, systems (if any) were developed by the previous owner and all of his bad habits are also ingrained in his dream business.
What oh what to do? It’s called due diligence and means research the heck out of every aspect of the proposed sale before putting your hard earnedÂ (or borrowed) money on the line. Every management consultant has stories of the client who came to them after they had purchased the business only to find extra partners, skeletons in too many closets to count and accounting that was managed by a mob boss.
A client bought a business after the owner told him sales were 35% more than actual figures and since the books had been ‘cooked’ the facts came out only after my client started running the business which was underperforming. This can also go the other way. I had a client who wanted to sell his business but had run his business like he did in China using Chinese Accounting (his words), meaning 2 drawers in the till, one dollar for the business and $2 for his retirement fund. The problem in this case? He earned $34,000 a month as a grocery store owner but claimed he earned $12,000. Imagine the look on his face when he tried to tell the prospective owner he had lied through his teeth with no way to prove the higher numbers.
The things to learn from due diligence:
Why is the current owner selling such a masterpiece business?
What are the books telling you of the business current financial status?
If the business is not performing up to standards what factors are creating the problems?
What is the long-term potential given your new management?
Will your management style easily merge with the corporate structure?
If there’s staff what issues come with them?
What is a fair and equitable price?
What are you prepared to offer, this is not an auction you will have time to make a considered offer ? Be prepared to negotiate.
I sent one of my clients to the business and made him sit in his car for 2 days with a clipboard and a counter. His job was to observe people walking by the store and counting people going in the door, counting at different times of day and observing the demographics of the people walking by.
I’ve walked into the businesses on either side of the business I was looking into to ask them for some ‘inside’ information and yes, even gossip. You’d be surprised when the guy next door tells you that the wife is leaving and divorce will clean him out so he’ll sell cheap.
How about going into the business as a customer to see how you’re treated, how employees work, how others see the business?
Opportunist? You bet!
If you do your due diligence it may make the difference to a good business opportunity and a dismal bankruptcy down the road. At least you will have a fighting chance.