WHAT TYPE OF BUSINESS SHOULD YOU BE LOOKING TO ACQUIRE?

Author: nfriend@franchise101.net

Date: FEB 3rd, 2009

Topic: Industry Experts

Go into your business search with an open mind as to what type of business you are looking for as there is a good chance that you will end up buying a type of business that does something you never imagined when you started the process. The criterion of what to search for involves more than the type of business. Many buyers make the fundamental mistake of buying the business that’s easiest to get into or one where they think they can make the most money instead of asking themselves which type of business are they best suited for. Most buyers have a reasonably accurate idea of the business they are looking for. Before you start your search you should define the following criteria:

  • Location
  • The size of business
  • Cash flow
  • Opportunity for continued growth and profits
  • Cash available for a down payment, acquisition costs and working capital

This should give you some idea of the type of business you are looking for although you may have expanded or narrowed your search and possibly changed the type of business you initially had in mind. It is not realistic to find a business that exactly matches your profile so you should expect to be flexible. You will then have to seriously consider what, if any, compromises or concessions you are willing to make. For example, would you still proceed if the earnings potential were less than you wanted or needed? What if you were looking for an Italian restaurant but found one that met all your other criteria but served French cousine? What about if the business was located in a different area than the one you had in mind? Obviously, it will be easier to be flexible in some areas than in other areas of the business but if you are too rigid in your requirements prepare to be in for a long search.

On the other hand, if you can’t find a business that matches your criteria it is possible that your criteria is unrealistic and you will have to redefine some of your requirements.

Location

Selecting a location involves two separate yet integrated considerations: (a) whether the location is convenient for you and (b) whether it is a good location for the business. You may only be interested in a business that is within an easy commute of your present residence. Alternatively, you may be willing to relocate to certain areas for the right opportunity or may be looking to relocate to a specific area and are wishing to purchase a business in that area. Moving to a new area to buy a business has inherent risks and demands serious consideration for a number of reasons:

  1. Buying and taking ownership of a business is very time-consuming. The additional burden of moving, possibly including selling your home, purchasing a new home, putting your children into a new school, organizing the move, and familiarizing yourself with a new area can be very stressful.
  2. Moving can be a very emotional experience for a family. You have to deal with the double challenge of settling your family into a new community at the same time as taking over a business. The emotional stress associated with a move can place a real strain on a family relationship in addition to the stress associated with getting the business up and going.
  3. Moving can be very expensive. At a time when you are using a lot of your financial resources to make an investment in a business you do not need the extra financial burden.

Obviously, there are a number of factors to take into consideration and they should all be seriously considered and discussed with your family before making a decision.

The Size of Business

Either revenues or the number of employees will define the size of business. A major factor in deciding the size of the business will be your investment level. Another consideration is the size of business you feel confident about and capable of managing.

Cash Flow

It is not enough to define what type of business without determining if the potential earnings will meet your requirements. The first step is to calculate how much money you need. Will the business provide you with that level of income? The common mistake amongst buyers is to overestimate their earning potential particularly in the first few years. This is particularly important, as this is the period when you will be repaying any business loans. Excessively optimistic projections often result from the buyer being convinced that they can increase profitability by rapidly increasing sales revenues. Of course, such an increase is possible but it most cases it doesn’t happen resulting in a shortfall in income. You will probably be focusing your search on a business that will generate sufficient cash flow to cover your current needs but with the ability to grow in the future.

Opportunity for Continued Growth and Profits

If you have sufficient cash reserves, you may be satisfied with a business that is currently losing money if it has a big financial upside. Regardless, most people are looking for a business that has opportunity for growth and increased profits. In addition to providing larger annual cash flows it increases the value of the business thereby increasing your equity in the business.

Cash Available for a Down Payment, Acquisition Costs and Working Capital

In addition to how much cash you have available or are willing to invest in a down, you must also consider funds for acquisition costs and sufficient working capital for your business.

The amount of acquisition costs will vary depending on the length of your search, as you have to live during this period, fund the cost of travel, long distance telephone calls. It also depends on how many businesses you investigate and how deeply you investigate them. If you only carry out a preliminary investigation of a business before you eliminate it, you will probably only incur minimal expenses but if your investigation of a business involves due diligence, which requires you to consult with professionals such as a lawyer, accountant or appraiser, your expenses will be significantly higher.

  • Written by Norm Friend
  • Norm can be contacted at:
  • Franchise 101 Incorporated
  • Phone: 604.925.2998
  • Fax: 604.925.9882
  • Email: nfriend@franchise101.net