This is a guest post from American Business Appraisers Guest Blog Post. Thank you!
Going into business for yourself requires a lot of careful thought and preparation. It is a venture that can make or break you, so it is vital that you decide what you want and how to go about it. Regardless of if you’re starting something from scratch or buying an already established company, you want to take into account how much time and money you are willing to invest, or if you need lenders. If you’ve decided that purchasing a business is what’s best for you, then take a look at the following basic beginner steps to help you sink your teeth into the initial buying decisions.
Identifying Your Interest – Although this seems obvious, many would-be buyers rush into purchasing a business without thinking about whether their interest will wane over time. For example, it’s great that you’re interested in buying a motorbike repair shop now, but can you see yourself being interested in it, say, fifteen years down the road? Is this your passion, or just a short-term way of making money? If you are only halfway interested in a particular business, there is a good chance that your lack of enthusiasm will affect the productivity and prosperity of the business as well as the employees. On the other hand, if it is something you are passionate about and you are eagerly determined to succeed, then you will naturally have a much greater chance at success.
Cost and ROI – Again this may seem like common sense, but some people do not stop to consider what they can afford and what is realistic. How much more are you willing to spend to keep a business going after you’ve purchased it? Take those costs into account along with any other costs you may be forced to absorb after buying. What does your return on investment look like? Of course, when you are buying an established business, it is easier to judge what kind of cash flow and business traffic you will have. But who’s to say that won’t change? Maybe a new owner will drive customers to your competition.
Competition – Educate yourself on the competition of the business you’re thinking of buying. Look into how many other businesses there are like this in the surrounding area and, if possible, find out how well they are doing. You will have to determine your strengths and consider how to beat the competition. For all you know, the business you’re thinking of buying could be selling because the competition down the street is so severe.
Investigate Issues – Let’s say you recently bought a small construction company that does fairly well in certain areas but, after you’ve purchased it, you discover that they only do well during months that the weather permits the staff members to be productive. Or perhaps the majority of the employees are contract workers and half the workforce left shortly after you acquired the business. Try to think of any potential challenges a company similar to the one you want to buy may run into in the future, and investigate how to remedy those issues, including delinquent employees, not enough (or too many) employees, faulty equipment, unreliable vendors, licenses or permits that need to be acquired or renewed, and so on. You don’t want to purchase a company and then immediately see a bunch of negatives during your first week on the job.
Assess Value – Try to evaluate the overall value of a business before buying, as this will help you in possibly negotiating on the price the current owner is looking for. Some sellers assess their price by using a multiplier formula of monthly gross sales or after-tax profits. One good way to determine a fairly accurate value of the business is to look at the book value, which is the difference between assets and liabilities to get the net worth and then multiply this by one or two. All of the company’s assets should already be listed in the asking price, and liabilities can constitute anything, including any of the issues from the aforementioned construction company example. A detailed valuation will help you find out whether or not the business you are interested in buying will fail or succeed in the long run.
Whether it’s your first business or a second go, being a small business owner should be exciting. All of the research, preparation and hard work can really fulfill your aspirations if you make the right decisions. However, to make the right decisions, you need to be as informed about your purchase as possible.
If you are looking to buy a business and need a valuation, American Business Appraisers of Arizona and New Mexico offers certified business valuations and machinery and equipment appraisals that help potential business owners or buyers find the right price. Please visit us online at http://www.americanbusinessappraiser.com or, alternatively, you can call (623) 935-2112 for our AZ office or (479) 871-8821 for our NM office.