7 traps to avoid when buying a business. I see it time over time where a good business is ruined by simple mistakes. How to avoid them.
Is buying a business a good idea?
Many times you will be unable to see value in a business and wonder how anyone could come up with prices that don't reflect reality.
However when you compare the cost of starting a business you will begin to understand values a little better.
The real time involved in doing the many things can be extraordinary. Assets are written down in value when you buy and cash flow starts from day on
Buyers are a terrible bunch of nervous investors not wanting to release cold hard cash for future potential. On the other hand sellers will always have an inflated concept of value, based on what a business can or may achieve.
There is a big difference between turnover and profit although both are important. A business generally sells on a multiply of net profit. As a rule 24 months is a good average so you work for two years to get a return on your money.
Therefore is there a happy medium when buyer and seller are happy.
Owners drawings and cash sales
These are the first two danger signals for any business.
First of all cash sales to avoid the tax department can never be considered in a sale. They are illegal but they can never be substantiated so don't consider them at all.
If you are selling a business stop the cashies for 6 months before going on the market then you can show value.
Owners drawings or even PAYG are what they love to call claw backs to be included in the profit. This is quite reasonable because it is what you can consider part of the earnings.
However be careful and work on real money and time. Sometimes a wife will work for free to support the profit, or drawings will come from overdrafts and not from income.
Branding and change of name
We spend a lot of time in building a business brand and a name so it generally has some value maybe even great value depending on how it has all been presented.
To change the name is really wasting years of marketing and starting over again is hard work.
Think seriously about this if you ever contemplate a new start it will generally do far more harm than good.
Changing how things are done
This is the single biggest mistake you can make. You buy a business because it is going well and then change everything around because you know better.
I have seen this destroy businesses many times because many just don't like change. It is that simple. Certainly you can slowly implement some of your own ideas over time watching the results for a downturn in performance.
I saw a guy buy one of the best cafes in my area, it had a huge following and a business established over many years. It had started from scratch in an out of the way location but had drawn a following.
The new owner immediately replaced all the staff with his own people, changed the menu, moved the decor, altered the coffee and genuinely thought he had done a great job.
A little cafe down a nearby shopping mall now has all the customers and the original place but a shell of its former self. He paid a premium for something working and has lost most of the value.
Another bought a good online tutoring business, it had been going successfully for many years and delivered a good return. Instead of going slowly the new owner revised everything to his way of thinking and the customers left in droves.
Yes institute your own personality but not at the risk of losing what you bought.
7 traps to avoid when buying a business the lure of the franchise.
Buying a franchise
Don't get me wrong a franchise can be a great investment, I had one that delivered huge results but I was screwed over by the franchise. They wanted the store for themselves.
No I am not bitter but now work closely with many franchise owners. In general a large percentage are unhappy. For someone wanting to get into your first business this is a good opportunity. The marketing is done for you, products supplied and methods installed so that you really should succeed.
As always the top 10% will be very good 80% make a living and 10% there own worst enemy and need to take a 9 to 5 job.
My advise to you is that before signing an agreement go and work in a few different stores for free. Talk to the business owners and get good feedback about the good and bad. Then make your mind up with reliable information and not The Franchise markeing crap, all glossy and gold plated.
In most cases you are simply buying a job, plugging away with your invested money, working long hours to make a basic wage. Consider if you can do something better with your time and money.
The shopping center business
Shopping center owners are ruthless, they have a profit motivation that exludes feeling.
You pay a premium rent because of high traffic volume, which is a fair deal. You are guaranteed customers walking in and the rest is up to you.
However beware the fine print in the lease. It could be a percentage of your profits or a rent hike on turnover. That is not profit it is the number of sales made turnover is the value and profit is not considered.
You may work all weekend with high wages to gather in more sales only to see the value gained ripped from under you.
The bigger store groups have a tight reign on this so the little guys suffer because they are vulnerable to bullying.
Really understand what you are getting into and your lease conditions without the halo of false promises.
The reality of online businesses
They are much the same as any business in that you need customers, sales and a return.
However investments may be much less and you have the ability to scale far greater growth than a walk in store. It will also be a lot easier.
Yes you can buy a business or start from scratch and add the time element to find success.
Combining online elements with your expertise can work really well. It may be tutoring, Social media marketing, affiliate sales or any similar activity, even a virtual store selling all sorts of products.
No rents, no nine to five hours and an open playing field. It has its advantages.
Online is the new world.
Conclusion on buying a business
firstly I have had my own businesses for nearly four decades and still operate a fixed business and online activity. I have owned two Franchise store and advised on the members panel. Then I took an idea to a listed company in a short period. The listed company went from $0.20 a share to over $1.00 in a short journey. A share market crash then destroyed the business and it was left languishing for quite some time. Not everyone is a winner.
I love the idea of working for myself and being responsible to no one. You work harder and longer but enjoy it more.
Secondly I beseech you to go into any business with a sound written plan and cash flow for the whole journey. Be hard on the results you think you will achieve because we all tend to be over optimistic in the early period. Seek the advise of professionals and others doing similar things so you understand the downsides to all the glory.
Finally love what you do and give it everything you have got because success is the greatest payback of all. Failure is not an option.
7 traps to avoid when buying a business by Peter Hanley
An investment in yourself