Five Sobering Questions to Ask Yourself Before Buying a Business

fiveIn everything we do, often the sheer excitement of an event, experience or a purchase pushes out everything else, including good judgment.

That’s to be expected, and sometimes, can’t be avoided. But buying a business is such an important event that has the potential to affect so many other things in your life.

Because of that, it’s important to put euphoria and excitement in their proper places and ask some sobering questions of yourself on your business-buying journey.

1. Am I interested in this business solely for the cash flow or prestige?

Both cash flow and prestige are perfectly legitimate reasons to be interested in a business. Money is important, as can be the feeling of being affiliated with something of value or class.  

But on their own or even combined, they’re not enough to keep someone building a business in the medium to long-term. There needs to be at least one other thing that attracts you, be it a fascination with the industry, interest in the city in which a business is geographically sited, or a desire to challenge yourself with something new (just to name a few).

An additional reason beyond money and prestige will make sure that this new business adventure is a long-term play.

2. Do I really want to do this all day?

In his book Restaurant Man food mogul Joe Bastianich goes a long way to disabusing people of the “glamor” of the restaurant business by discussing the realities of the hours (18 a day), and the days you’ll work (weekends and holidays), and how much money you’ll make (20% blended margin even on the high end).  

He does this to discourage the dilettantes who like watching Food Network and think getting into the industry would be “fun.” If the business requires an active owner/operator, are you willing to sleep/breathe/dream about the business during a large part of your waking hours?

If not, you should probably pass.

3. Will demand exist in the coming years?

If you’re interested in growing a business, not just in maintaining cash flow based on a product that is headed for legacy country, you need to ensure that demand will continue to maintain, and even better, grow in the years ahead.  

Look at regulations, the competitive space, and your own costs of capital as part of a blended approach (that includes examining news and reports and talking with veterans of the industry) to get a solid answer to this question.

4. Why is the seller selling?

There’s nothing wrong with someone being “tired” – either in the sense of working in this particular business or industry or working in general. It will happen to all of us at some point. What we want to be wary of are sellers making decisions to sell for abrupt reasons.

Sometimes a family illness or personal emergency will precipitate just such an occurrence. This doesn’t mean a good transaction can’t take place.

It just means that because it was unexpected there are necessarily things that might have been missed, and both buyer and seller (but particularly the buyer, who will be left with the business when all is said and done) need to ensure that the business can indeed not just survive, but thrive with a new owner.

5. How much does the business depend on him/her?

At APEX we’re advocates of Michael Gerber’s famous phrase: “Work on your business, not in your business.”  This flows from a desire to transform a business from a handful of people who are relying on hustle and willpower to a well-oiled machine that relies on processes, not personalities.  

Ensure that the business isn’t overly reliant on the owner. If that’s the case, and the owner isn’t willing to make changes before the business sale to address the issues, consider negotiating a longer transition period or additional seller financing.

One of the reasons we exist is to help people navigate these and other key questions when preparing to make the life-changing decision of buying a business. We’re always here to answer your questions. Give us a call today at 913-383-2671!