When you are looking for that perfect business for you to purchase and find several that seem interesting to you, what do you look for to determine which would be the best business? Here are five key metrics that may help you compare and decide which business to buy.
1. Product or Process – You will probably be looking for a certain type of business that sells a product or process in which you are interested, but the products or processes will not be identical. Choosing this may be the easiest of any of the decisions, as you want something you enjoy and look forward to each day. Whether you are selling a product or process, you are going to find it easier to sell if you really like the product or process.
2. Quality of a Plan – Always ask business owners if they have a business plan and look at the plan to see how thorough it is. Look at their purpose, their goals, and how they plan to accomplish them. Compare those to what you want to accomplish and look at ways you can have a positive impact on the business. Comparing the goals and accomplishments of businesses with your ideas will be a big factor in which business is a fit for you. You can see a good business plan as an indication of the organization and planning that has been essential in the growth of the business. On the other hand, if you look at a business that has no business plan, you may see it as an opportunity to organize the company and make it show even more growth. Looking over the plans of a business may show suggested opportunities that have not been developed or may give you ideas of new opportunities you can develop to grow the business. The plan will also show how the product or process is marketed. Comparing the marketing of similar companies may help explain the difference in sales. Do they spend more than they should on advertising or are they creative in finding ways to market the business without spending from the budget?
3. Financial – The financials are important and reflect how well the business is doing in other areas. The financials are the easiest to compare, as you will have Profit and Loss Statements, Income Tax Returns, and Adjusted Cash Flow for the businesses you are comparing. They should be pretty standard and show accurate figures. If you look at a business that does not have accurate financials, walk away. It makes no difference what owners tell you they actually make if it doesn’t show on their financials. Also, when you start comparing businesses on the internet, they should give enough financial information to show there are actually financials to see. If they don’t give any financial information, that usually means the broker has gotten no financials and based the asking price on what the owner wants to ask. Again, don’t waste your time. Financials are crucial when comparing businesses.
4. Customers – When comparing customers of businesses, it is important to know the demographics and to look for areas to increase sales. It would be good to see if the market is saturated or if there is potential for additional customers. Is the business close to high-income housing or low-income housing? Of course, the type of business would dictate which would be best.
5. Performance and Progress – One thing to compare is the efficiency of the businesses. This would reflect in the expenses on the financial statement, but would also reflect in the income. The sales performance will show if the employees are working at their full potential and if there are more or less employees than needed. Is overtime paid often or are the employees looking for things to do to keep themselves busy? Does the owner work in the business or does he/she have a manager or managers to run and oversee the operation? Whether you want to actively participate in the business or have a manager run it would certainly be a consideration in your purchase and whether a manager is in place.
There are many Metrics to look at when comparing businesses for sale and deciding which one to buy, but these are some key ones to help you get through the process.
