Searching for the right business to buy can take time. With this list of Ten Commandments, you can filter out the bad investments and cut straight to the profitable ones.
To determine the potential upside and future of any business, it must subscribe to all the Ten Commandments - not nine of the ten, but ten of the ten. Learn them by heart, understand each one fully and make certain that you refer to these each and every time you evaluate a business. If you have any doubts about a particular business meeting these, then move on to the next one.
Commandment #1: Pay for the Past, Consider the Present, Buy it for the Future
The actual price that you pay for any business must be based solely upon the activities of the past. The purchase price MUST reflect the financial results (good or bad) that the current owner has generated in the business, with no excuses for underperformance.
You should also pay attention to when the seller decided to sell their business. If it has been for sale for many years and the owner’s focus is no longer fully concentrated on running or building it, neglect can result. During the due diligence period, you can have your accountant (or the seller’s CPA) do an interim financial statement to examine this.
You must establish a purchase price based upon the past - but you should only buy a business because of what you believe the future will bring with you as the owner. Can you make the business better? If the answer is anything less than an overwhelming yes, it’s time to move on.
Commandment #2: Buy a Good Business and Make it Great
There is a middle ground to be found when you’re looking to buy. I believe there are three kinds of business, which I call the three ‘g’s – garbage businesses, good businesses and great businesses. The ideal should always be to find a ‘good’ business at a reasonable price – not one which is underperforming and cheap, or one which is thriving and that you will pay a premium for. ‘Good’ businesses have the most room for improvement, and are the best value for money.
Commandment #3: Ingredients are NOTHING without a Recipe
Imagine if you are given a huge list of ingredients and asked to prepare an elaborate dish. What do you think your chances would be to complete it successfully without a recipe or any guidance whatsoever?
The same applies to buying a business, except here the ingredients are the product, the employees, the inventory, the customers, the suppliers, the systems, etc. The recipe is the strategy/vision by which all the ingredients will be combined successfully to execute the plan of the business. If you do not have the right recipe, you will have a terrible time trying to make the ingredients into anything other than a big mess. Look for businesses with goals and a clear direction.
Commandment #4: Fall in Love with the Profit Potential, NOT the Product
When looking at a business, focus on how much profit you can generate from it and not on how exciting the product is. You would not believe the number of people who buy a business for the product and completely overlook whether they’re in the real world about the business’ profitability.
At times, the most profitable businesses are those with the drabbest product lines, like valves or shoelaces. Conversely, a wonderful product that has limited demand is meaningless. Be certain the product that any business offers has a ready market available to sell. In other words, do not get into a business where you have to create the demand and awareness for the product or service that you offer.
Commandment #5: Do What You Do Best and You’ll Manage the Rest
All businesses have a single fundamental component that they must do well in order to survive. If they do that particular thing better than the competition, they will thrive. But here’s the golden rule: whatever it is that you do best (sales, operations, logistics, etc) must be the single most important “driver” of the revenue and profits of any business you purchase.
You’re searching for a business where your specialty, your single best skill, perfectly matches whatever the business needs most to drive revenue and profit. For everything else, hire the best people you can afford!
Commandment #6: Find a Business that can run Independently
Your business should be able to function effectively even when you’re not at the wheel.
Assess the current systems in place, and aim to automate at least 75% of all day-to-day functions with technology. In an ideal world, the business you’re buying should:
- Not have unnecessary down time if an employee is on holiday
- Generate useful reports for you to monitor its activity regularly
- Allow you to make decisions based on data and not ‘gut feel’
- Have systems in place that allow you to duplicate the business in other locations
Commandment #7: No One is Bigger Than the Game
If you think that being your own boss means you will no longer be accountable to someone – forget it! Every business and businessperson has to answer to someone. If a business relies on a few large customers, or on one salesperson, then they are the true bosses of the business. If you rely on suppliers and manufacturers for the products you offer, then they are the bosses.
While buying a business will greatly reduce how much of your destiny is in the hands of others, it will not eliminate this situation completely. Neither you nor the business is bigger than the game. Identify who the boss really is, and make certain that you are comfortable with the relationship. Of equal importance is that you evaluate the amount of leverage this “boss” has over the business, and determine what happens if they disappear.
Commandment #8: So What Do You Do For A Living?
Think of what your response will be when someone asks: “What do you do for a living?” First, it will help you determine what the business truly is. If it takes too long to explain what the business does, it’s probably too complicated. If you can’t explain what the business does in a few short sentences, then how are you going to market it?
Second, it must be a business that makes you proud when you tell someone about it. Your business will become an extension of you. This will happen in your head, in your community, and in your bank account. I do not propose that you become obsessed, but you must be passionate about it, and constantly strive to make it better. If you can’t see yourself doing that for the business you’re buying, look elsewhere.
Commandment # 9: What’s Not Perfect…Yet?
Make a list of everything you can identify as falling below the “perfect” level. Then, outline a brief plan of what it will take to get it to the levels where it must be. Hopefully, you won’t find too many. If you do, it may be a sign that getting the business together will be too daunting. Nevertheless, focus on what’s not perfect yet, and then decide how to make it right, and at what cost.
Commandment #10: What’s it Worth to YOU?
Once you start looking for a business to buy, you may find there are a lot of “experts” offering you their two bits of wisdom. While you should be respectful of their comments, they can’t have any bearing on the final decisions, which can only be made by you. It is not their money, their future, or their value systems. Only you can determine how much a business is worth, so you must be certain it will deliver all of the benefits you want it to.
This article has been adapted from How To Buy A Good Business At A Great Price, a course written by Richard Parker at RichardParker.com. To gain access to the full course, which walks through the entire process of finding and successfully purchasing the perfect business in detailed steps, click here.
