Thinking about buying a business?

Photo from carwardin.co.nz

Originally Posted On: https://www.carwardin.co.nz/thinking-about-buying-a-business/

Done right, buying a business is a realistic alternative to paid employment. And if you prepare well and invest the time you will minimise the risks, and ultimately improve the odds that the venture will be rewarding and profitable for you.

Here are some valuable tips on how you can get it right. 

I’d like to start by drawing the distinction between finding the ‘right’ opportunity and a ‘perfect’ opportunity. The latter is incredibly rare if not impossible to find, whereas the right opportunity will be a quality business where you are comfortable with the prospect of having to manage the commercial and business risks.

Probably the most common “business ownership” conversation I have is with people who have previously been successful in corporate life or have returned from an extended time working from overseas, and who are looking to buy a business.  They may be looking for a change where they can make use of some solid business and commercial experience and also have the desire to be their own boss and run their own business. I.e. make money for themselves and not for someone else!

Typically, the first conversation we have goes something like: ‘I am looking to buy a good business, with good profitability and cash flow and great opportunities to grow’. While those are important parameters, it’s not particularly defined (or helpful!) as far as “investment criteria might go, especially when compared to how an existing business (a ‘trade buyer’) or experienced investor might approach the situation. What about the industry, size, owner involvement, workforce and management,  types of clients, profitability, the rate of return and a host of other factors that should be considered?

For me, the most important thing about finding the right opportunity is to match risk and opportunity with your personal goals and appetite for putting your money on the line for a business. From my perspective, a good match leads to better odds of longer-term returns, whereas a rushed decision to purchase will have a higher chance of poor or negative outcomes. Not surprisingly, I would also expect that you will find it easier to obtain finance or funding for those ‘good match’ deals.

And, finally, if you can be very precise about where you see the value in an opportunity then it might make it easier to have the conversation as to why you might be putting your assets on the line to buy a business!

Aside from being certain of your own personal investment criteria, the best way of getting ahead of the pack is to be as proactive as you can be. Make it known in the right quarters that you are in the market and serious about purchasing a business, and above all, that you are well prepared.

While in a perfect world there would be a complete list of all available businesses to pick from, the reality is quite different. Success often depends on how well and how quickly you can identify and then evaluate an opportunity before they get snapped up.

The feedback I get from buyers suggests that there is no shortage of businesses on the market and that you may have to evaluate or even bid on a number of opportunities before you are ultimately successful. Your search will include considering sources like TradeMe and broker websites, but be aware though that if you’re not amongst the first to spot them, some of these opportunities will already have had a number of visits from other interested parties and may no longer be the ideal hunting ground. You’re at risk of only seeing opportunities that the leading pack has already picked over and left behind.

For that reason, reaching out to talk to people is critical. That list of people to talk to will include business brokers and business owners as well as professional advisors such as bankers, accountants, and lawyers.

I can guide you towards getting a good understanding of the business that you are considering to purchase and help with your preparation. I can call out particular areas that you may have to give special attention to. Remember that each business is different and there may be conditions that are not immediately visible to you.

If need be I can help you to approach a valuable list of commercially astute parties that would be interested in your plans and how to advance them.

It’s common for me to get feedback from potential buyers that the investment in time and effort, even get to the point where they are ready to make an offer on a business is far beyond their initial expectation.

As you can imagine from my earlier comments, you will need to allow sufficient time for the discussion and evaluation of each opportunity that you are considering. This can prove to be especially challenging if you are in full employment elsewhere, for example, and need to make time for phone calls and meetings. Don’t underestimate the time it takes meeting with owners, advisors and to undertake due diligence – both preliminary and formal, once an offer is in place.

While this can be a frustrating process, my observation is that the more opportunities you look at, the quicker you will become at evaluating those opportunities as your experience builds and your investment criteria narrow.

I spoke to Rodger Eaton, Owner of Boxkraft Limited Roger has first-hand experience of buying a business.  He cut his teeth in the corporate world, including as Marketing and Innovations Manager at one of New Zealand’s major industrial conglomerates, before buying Boxkraft in 2005.  Rodger has subsequently grown Boxkraft – both through organic growth and also by buying other businesses.

I asked Rodger to provide three (3) key points for ex-Corporates like him to consider if they are interested in buying a business.  He suggests:

1. “Jump out of a Big Corporate job and work in a small business for a year or two to see if you like it.  It is a very different world and it will give you a better perspective before you start looking to buy something.
2. When looking at different businesses transfer the profit and loss data into a common forecast cash flow model that has 12 months Profit and Loss and Balance sheet all linked (an ‘integrated cash flow model’).  The model should show everything down to estimates for depreciation, interest on loans and tax. My model goes down to cash flow at the bank account.  This way you can compare different businesses as you go through the due diligence process.  They are all different, stock, margins, returns, etc.  
3. Have another spreadsheet for a daily cash flow forecast for the next 12 months. This is important when you start in a new business and begin to understand its lows and highs.  It also lets you sleep at night as you have fewer surprises.”

Rodger’s comments are excellent suggestions.  At the risk of labouring the point about the importance of finding the ‘right’ opportunity, I’d also suggest this process is often not just about evaluating how good the business opportunity is, but also about matching your own skills with the opportunity. Sometimes you might come across a quality business, but it’s just not right for you. Ask yourself whether you really want to be a business owner, what it takes to fill that role well and whether it matches your capabilities and strengths.

So, in addition to Rodger’s suggestions I’d add the following:

4. Ask yourself what you are good at and where your strengths lie?  Some people are great at starting things; others grow opportunities; others are better at managing and maintaining. Owning a business will likely direct you to what you should focus on and what your ideal role will ultimately be.  Successful business owners realise what they do well and where they need to employ complementary skills.

5. Think carefully about your expectations.  Owning a business is often not a perfect life (there are times when it can be far from it). My advice is to get the big picture right and to be prepared to work around the lesser imperfections, especially at the beginning of your journey.  Be prepared to make the 24 / 7 commitment required of a business owner, including managing your employees.

6. Decide on your natural risk profile. Be careful not to over-commit, especially financially. Have a clearly determined and achievable outcome.

I am aware that people will sometimes have a negative perception of brokers!

However, I like to think that there is potentially good value to buyers in having the right discussion with an experienced and specialised broker.

No one broker will have full visibility of the market, but a good broker will be able to present quality opportunities for you to consider. If you can be clear about what you are looking for then it’s unlikely that the broker will waste your time.

Remember that brokers will typically be acting for the Owner of a business who is selling – i.e. not for you as a potential purchaser. I personally always look to introduce good, qualified buyers to my Owners where I have confidence that there is a high probability of a transaction being concluded at a fair price. I am always looking to do this in a way that provides the least disruption to the business and maintains confidentiality, which is of benefit to the Owner and the ultimate Buyer.

Finally, I think it’s only natural to be skeptical about the opportunities that are being presented to you. Your role is to be prepared well enough to follow through with confidence in your processes and your ability to evaluate and hopefully to complete the right opportunity for you.

Therefore, the more experienced, informed and decisive you are the better!

All the more reason to make sure you have good advisors around you.

Even though this blog is a bit long, it still only really touches on the subject. There are many more elements to making a successful business investment.

Please give me a call, if you are interested in knowing more.

Here is the link to Box Craft