photo credit: Gord McKenna via photopin cc Many toy with the idea of buying a business for themselves; but it’s such a risk most never take the chance. Here are 10 rules that will guide anyone to making better choices.
1 YOU are the most important consideration
It’s a mistake to first value a business as a financial investment. Most importantly it's a career investment. Your life to date has given you valuable skills and experiences. Use Reflection exercises to understand your Personal Business skills first; then seek an opportunity that will utilize them. Lesson 8 (free preview available) of the online Fit for Life workshop is a great starting point. Also the book Business Model YOU.
2 Discover your preferences
In addition to skills, your business performance is affected by preferences. Clarify the business preferences that make a difference to you. You can download the Franchise Business Model worksheet which is further explained in the online workshop Lesson 11 (free preview available) as a guide for this. Be comfortable with your risk and sales orientations as discussed in this lesson before buying a business.
3 Search in specific business categories and geography
If you don’t know what you’re looking for, it will be extremely hard to find. Online businesses for sale directories estimate that 90% of the people registering for their services are unable to purchase a business. Most of these failures are those going there to find easy, secure sources of income. They aren’t obvious. What you can find are opportunities that may or may not fit YOU. The directories are organized by business category and geography, so having a set of these criteria to focus your search gives you a reasonable chance of finding those opportunities. Even if you use a business broker, they can do little to help you without focus from you.
4 Creatively research your financial situation
A profitable business or franchise, with good books and records, can be partially financed; however, each opportunity will have a downpayment. You may be surprised at the financing opportunities available to you with a little research. The SBA offers a number of programs, plus there are alternatives to SBA loans that are often even more attractive. Combine your risk preference with your potential financial capabilities to set the financial scope of your search. This can also be added to your search criteria.
5 Have a personal contribution for your business
A business brings resources to a market. In most cases, the owner makes a significant contribution to one of these two areas. If your potential contribution is resource management, look for opportunities with established sales assets. Look for an established brand, location, or sales network. If your contribution is sales and market management, look for established resources like a desired product line or service that appeals to you. The same logic applies to finding the right franchised business to buy.
6 Utilize Key Partners
No one is successful by themselves. Even the Lone Ranger had Tonto. Learn to develop and use Key Partners as soon as possible. These are going to be the people in your life that will help you through difficult decisions. If looking at franchises, ask other franchisees how much support is received from the franchisor? If looking at independent businesses, look for people who will be able to add to your expertise. They can be the former owner, key employees, vendors, and professionals such as financial advisors and business consultants. If married, take time to communicate wholly with your spouse. They may or may not be able to help on any given specific; but they can help you understand YOU; and you will be a big part of the business.
7 Be able to Model any target business
When you find an interesting business to buy, be able to quickly answer the question, so what makes this business work? Financial statements will not tell the story. It’s a Value Proposition that has to make sense to you and that you can easily explain. The Business Model canvas is a proven tool here. Use it or anything similar. You are going to be be buying that Value Proposition, not its cash flow.
8 Understand the cash flows
Most business opportunities are priced on cash flow. The problem is that cash flow is a concept, not something physical that can be easily measured. That allows for a lot of “creativity” in its calculation. In general, wherever there is a reason to add to profit for cash flow, there is also a reason to subtract from it. For example, if cash sales are not completely reported on tax returns, then suspect that there are cash expenses that may also be missing. If depreciation is added-back to profits, then also be sure to subtract also capital replacement costs. If interest is added-back, then debt service should be subtracted, etc. After first understanding your reasons to buy a business, then work on understanding the financials to establish reasonable pricing. If you are not comfortable calculating cash flows, find a key partner to help you in this area.
9 Respect the seller
Almost every independent business on the public market is there because the owner has burn-out. This could be from age, sickness, changing personal opportunities, or changes in the business. However, this doesn’t mean they don’t value their business. It’s an extension of themselves as much as a child might be. Deals happen when the owner sees in the buyer someone who can take care of their child as well as pay reasonable value for it. Franchisors are expanding their operations and are looking for team players who can help them. They are looking for someone who can compliment their system as well as afford to participate as an owner. In either case, both sides must first respect each other enough to make any financial considerations worthwhile.
10 Begin with the End in Mind
Do you want to be the one selling this business in the future due to burn-out yourself, or would you rather have used it to achieved the financial goals necessary to move to the next stage of your life? Start with clear ideas for your exit plan. A business is more than a cash flow; it’s a stage of life and will best serve you when seen in that light. Having some idea of what should come next and when you want it to happen will guide you in making better business decisions.
1 YOU are the most important consideration
It’s a mistake to first value a business as a financial investment. Most importantly it's a career investment. Your life to date has given you valuable skills and experiences. Use Reflection exercises to understand your Personal Business skills first; then seek an opportunity that will utilize them. Lesson 8 (free preview available) of the online Fit for Life workshop is a great starting point. Also the book Business Model YOU.
2 Discover your preferences
In addition to skills, your business performance is affected by preferences. Clarify the business preferences that make a difference to you. You can download the Franchise Business Model worksheet which is further explained in the online workshop Lesson 11 (free preview available) as a guide for this. Be comfortable with your risk and sales orientations as discussed in this lesson before buying a business.
3 Search in specific business categories and geography
If you don’t know what you’re looking for, it will be extremely hard to find. Online businesses for sale directories estimate that 90% of the people registering for their services are unable to purchase a business. Most of these failures are those going there to find easy, secure sources of income. They aren’t obvious. What you can find are opportunities that may or may not fit YOU. The directories are organized by business category and geography, so having a set of these criteria to focus your search gives you a reasonable chance of finding those opportunities. Even if you use a business broker, they can do little to help you without focus from you.
4 Creatively research your financial situation
A profitable business or franchise, with good books and records, can be partially financed; however, each opportunity will have a downpayment. You may be surprised at the financing opportunities available to you with a little research. The SBA offers a number of programs, plus there are alternatives to SBA loans that are often even more attractive. Combine your risk preference with your potential financial capabilities to set the financial scope of your search. This can also be added to your search criteria.
5 Have a personal contribution for your business
A business brings resources to a market. In most cases, the owner makes a significant contribution to one of these two areas. If your potential contribution is resource management, look for opportunities with established sales assets. Look for an established brand, location, or sales network. If your contribution is sales and market management, look for established resources like a desired product line or service that appeals to you. The same logic applies to finding the right franchised business to buy.
6 Utilize Key Partners
No one is successful by themselves. Even the Lone Ranger had Tonto. Learn to develop and use Key Partners as soon as possible. These are going to be the people in your life that will help you through difficult decisions. If looking at franchises, ask other franchisees how much support is received from the franchisor? If looking at independent businesses, look for people who will be able to add to your expertise. They can be the former owner, key employees, vendors, and professionals such as financial advisors and business consultants. If married, take time to communicate wholly with your spouse. They may or may not be able to help on any given specific; but they can help you understand YOU; and you will be a big part of the business.
7 Be able to Model any target business
When you find an interesting business to buy, be able to quickly answer the question, so what makes this business work? Financial statements will not tell the story. It’s a Value Proposition that has to make sense to you and that you can easily explain. The Business Model canvas is a proven tool here. Use it or anything similar. You are going to be be buying that Value Proposition, not its cash flow.
8 Understand the cash flows
Most business opportunities are priced on cash flow. The problem is that cash flow is a concept, not something physical that can be easily measured. That allows for a lot of “creativity” in its calculation. In general, wherever there is a reason to add to profit for cash flow, there is also a reason to subtract from it. For example, if cash sales are not completely reported on tax returns, then suspect that there are cash expenses that may also be missing. If depreciation is added-back to profits, then also be sure to subtract also capital replacement costs. If interest is added-back, then debt service should be subtracted, etc. After first understanding your reasons to buy a business, then work on understanding the financials to establish reasonable pricing. If you are not comfortable calculating cash flows, find a key partner to help you in this area.
9 Respect the seller
Almost every independent business on the public market is there because the owner has burn-out. This could be from age, sickness, changing personal opportunities, or changes in the business. However, this doesn’t mean they don’t value their business. It’s an extension of themselves as much as a child might be. Deals happen when the owner sees in the buyer someone who can take care of their child as well as pay reasonable value for it. Franchisors are expanding their operations and are looking for team players who can help them. They are looking for someone who can compliment their system as well as afford to participate as an owner. In either case, both sides must first respect each other enough to make any financial considerations worthwhile.
10 Begin with the End in Mind
Do you want to be the one selling this business in the future due to burn-out yourself, or would you rather have used it to achieved the financial goals necessary to move to the next stage of your life? Start with clear ideas for your exit plan. A business is more than a cash flow; it’s a stage of life and will best serve you when seen in that light. Having some idea of what should come next and when you want it to happen will guide you in making better business decisions.
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