Four Questions Every Buyer Should Ask
Knowing why you want to own a business and what to look for
Not everyone can handle the risk of starting a business, but plenty are able to withstand the hurdles of owning an existing one. Knowing that, below are four great questions that every buyer should ask themselves when looking to purchase a business.
What’s my motivation?
We’ve all had bad days where we don’t only want to throw in the towel on our jobs, but where we consider the alternatives. The old 9 to 5 just isn’t cutting it anymore, and the looming picture of endless monotony is a heavy stone in the stomach. You look up from your desk and realize that many around you are tackling modern Sisyphean conundrums, so you start searching for better options. Perhaps it comes to a pro-con list outlining the best of what can be and the fall you might take trying to achieve something better. So, naturally, when the cons outweigh the pros, you give up and convince yourself that an office job isn’t really so bad. That’s a perfectly decent decision, but only if you don’t educate yourself first.
Jodi, a buyer working with The Firm, has faced this dilemma herself. She’s spent over a decade working corporate jobs, but felt as if something was lacking. Jodi wanted to make the rules and be her own boss and, frankly, to have something of her own. Like the example above, she started out by casually hunting for businesses that piqued her interest, but that didn’t work. “You can’t have one foot on each side of the fence, because then you’re not really looking at a business,” she says. You have to make a conscious effort to move from behind the desk and into the boss’s chair. Simply dabbling in looking at business ownership isn’t enough to motivate you to punch ahead. Having a great idea is nothing until you push the buttons to jump start the future.
What are my limits?
Although Jodi is now serious in finding the ideal business for her needs, she is keenly aware of her financial and personal restrictions. Having spent years in an office environment, she has little to no skill sets when it comes to labor-based industries, but she isn’t letting that limit her options. “Looking at a business in an industry where I have no practical knowledge doesn’t scare me, since I know there will be qualified staff in place to do what I can’t,” says Jodi. What’s more important is how a specific business will fit into her daily life. Will it hinder her time with her family, or will it put too much strain on the checkbook? For Jodi, one important restriction is travelling. “I have a fairly young family, so it’s important for me to be nearby as much as possible. I can’t have a business that will require too much travel time,” she says.
Personal limitations aside, Jodi has a targeted salary in mind that has immensely helped her in looking at available businesses. Knowing what The Firm has to offer and learning from her broker at The Firm, she’s educated to the point where she knows exactly what she can afford. “I need to be able to earn $120,000 per year after taxes, and I have a 401K that I can pull $50,000 or $60,000 out of for a 10% down payment. Based on those numbers, I know that I can purchase a business priced as high as $500,000 or $600,000.” Sure, she can take more out of her retirement if need be, but it’s more important for her to weigh long-term risk with the short-term. “I want to buy what I can afford now and then grow it to strategically buy a complimentary business,” says Jodi. Little, if anything, can be gained by overextension, when smaller bites can lead to fuller growth down the road.
What is a deal breaker for me?
Knowing your financial strength is half the battle. Understanding what you’re looking at will win the war. Many businesses and industries go through waves of growth and decline, and Jodi is perfectly aware of that. She’s not afraid to look into why a business may be down one year. “I’ve looked at some ag-based companies and I understand that 2016 numbers are down for most in the ag industry. It was a bad year, so as long as I know the reason behind lower numbers, I’m ok with taking a peek.”
The other end of the spectrum isn’t always so rosy, either. Some companies see huge growth year after year, but knowing if that growth is simply a bubble is key. “I wouldn’t want to buy a business that keeps growing and seems promising but then fizzles out.” Looking beyond the numbers and learning why they may be up or down can really tell you about a particular industry or company. For Jodi, if the numbers are inconsistent and it’s not clear why, then a business must have a consistent bottom line or the risk is just too high.
Who is my support structure?
While it’s important to have those around you providing encouragement along this path to ownership, it’s equally important to know who truly supports the business. Employees are key during transition, as not only do they most likely know more than you about the company or industry, but they will have skill sets you don’t to keep. For Jodi, the staff is almost as important as the numbers. “When I’m looking at an organization, I have to realize that the staff will be mine once the seller leaves. I need them to be well-trained and invested in success,” she says. A company that is too reliant on the owner is dead in the water. You can’t step into someone else’s shoes and expect the same results. Spend your time and effort on a business where you can lace yourself into it and not have to lace up in your predecessor’s old sneakers.
Arming yourself with these four questions of knowing why you want to own a business and what could help or hinder that possibility makes searching for a company to own far easier. It will also help alleviate your fears, but it won’t eliminate your risk. You simply have to decide if the risk of doing the same thing until retirement is better and more satisfying than doing what you want and dream to do. The choice is yours.
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