There are many different reasons one might consider buying a business. Maybe they specialize in a niche product line or geographic area that has a small footprint.
How are you going to buy a competitor if your own business isn’t making money? If you do not have the capital to purchase equipment or property, or have the cash to support a new hire, you are likely under-charging for your time and/or products. There are many other ways to help the bottom line, but the one big mistake small business owners typically make over and over again is not valuing their time and not understanding their business. You need to understand your business and that does not mean knowing which vinyl to pair with which substrate. It means knowing your wage to gross ratio. It means knowing your burden rate. It means knowing how to read and interpret what is going on with your income statement, balance sheet, and cash flow statement. If you thought about copying and pasting those last couple sentences into Google translate, you may not be ready to tackle the purchase of another business.
Ask questions
Ask questions of everybody you have access to (the seller, lawyer, accountant, employees, customers, business mentor, your mom). You may be surprised what sort of information the seller will divulge to you in casual conversation. Find out as much as you can about the operations, staff, products, pricing, clients, and their motivations for selling. You can use the information you gather to create as clear a picture as possible of the business. If you find yourself wondering, don’t be timid, ask the question.
Know the numbers
Remember when I told you to know and understand your own business? Putting in that time and effort starts to pay off. When you see the numbers, you want to know and understand them intimately. What seems low? What seems high? What jumps out at you right away? Compare their numbers to your own. What is the same and why? Does it make sense their wages are similar to yours even though they have three fewer employees? What is different and why? Does it make sense their material expenses are 40 per cent of their gross revenue when yours are only 23 per cent? Why are they breaking even this year when they lost money the two previous years? What did they change to make the business look more attractive to sell? Are those changes sustainable, or even legitimate? Most of the answers to these questions should come from the knowledge you have about your own business numbers. You should be able to answer the rest of the questions based on the information you gather about the business operations.
