So you want to buy a business! That is the American dream. However, there are several things you need to think about before you take that big step. I will discuss some of the practical considerations in running a small business in a later blog but for now let’s discuss your decision and some of the issues involved in a decision to buy any business.
The first question to consider is do you have the personality for running a business? It is not for everyone! Folks coming from a corporate, government or an otherwise structured entity are accustomed to having multi departmental support. However, when you buy a business especially a small business you are the CEO, the marketing VP, VP of sales, HR and the person responsible for driving revenue.
That leads to our next major question: What is your risk tolerance? Make no mistake about it! There is always a risk in buying a business no matter how well it is performing.
There are always unforeseeable circumstances. In the event of crisis are you prepared? What about your family? What is their risk tolerance? How involved do you expect them to be? Do you think that they will support you for the long term?
Examine your present financial obligations. How realistic is your business plan? Has your business plan taken into consideration dry periods of revenue? There are snow storms, stock market down turns and a multiplicity of other unforeseen and intervening negative impacts. Do you have a financial cushion to sustain you during those periods? Are you going to make changes to the way the business is presently being run to drive growth? Do you have the financial resources to implement that strategy?
What about financing? Do you have a sufficient line of credit?
Should you be thinking about having a partner? Partners can be good and bad news. The good news is that there is shared responsibility and shared risk. Bad news is that like a marriage, it requires tolerance, trust, personal commitment and loyalty. Folks have different personalities and partners in business need to be able to balance those personalities, leverage their strengths and mitigate their differences.
Along those lines perhaps a franchise is where you need to be. However, although franchises provide for a great deal of startup details and have statistics that may predict success there are many other factors. Vigorous due diligence is a must. It is helpful to investigate legal causes of action filed against a franchisor by franchisees. What is their consumer rating?
Remember, franchises that are most successful and collaterally have less risk usually also require a much greater investment, have greater royalty demands and exercise substantially greater control.
What is driving your decision to buy a business? Would you consider a business be it in any industry as long as it met certain financial and logistical criteria or do you have a passion for a specific industry?
In the event of the former you and your advisors can apply objective number crunching and analysis.
In the event of the latter it is critical that you investigate it thoroughly without rose colored glasses. Passion for a particular industry is a good thing as long as your analysis is objective.
For example, there are a lot of markets that are hot today but may have limited longevity. A good example may be the organic food industry which is enormously popular and presently humming. Recently shoppers have been flocking to locally grown, sustainable products and that has gotten the attention of big companies. Large retail chains are stocking organic products from small growers, and venture capitalists have started investing in the industry.
However, this attention has caused problems. Many business owners say they’re struggling with issues of scale and are scrambling to source enough products to meet the demand. Unlike big companies it’s difficult for small players to source products all over the world to ensure that they have access to supplies and can keep their shelves stocked. It’s also more difficult for startups to get favorable contracts with multiple suppliers to limit impact of changing market conditions.
The lesson learned is passionate dedication to certain products and industries is great especially when those markets are hot but you need to know the downside and have a plan to manage those inevitable challenges.
Study your industry of interest and speak to those who are in it. Most importantly get professional advice from business brokers, lawyers and CPA’s who work with small businesses.
Now, if you are still determined to jump in, welcome to the world of entrepreneurship that drives 80% of the US economy!
