The 4 absolutely vital questions to ask before buying ANY business …

There are some great FREE sources of information out there in the Internet.

 One of my favorite (when it comes to stocks and options) is The Tycoon Report – and the related (and wonderful) Q&A sister site, Ticker Hound.

 However, sometimes you have to question the advice that you are given … for example, The Tycoon Report recently published a post on the …

4 Questions to Ask Before You Buy a Private Company

 After soliciting responses from their reader base, here are the 4 questions that they came up with and a little snippet of some of their (generally) excellent advice:

1. Do I understand the business?

To really “understand the business” you must know exactly how the business makes its money and exactly where the business spends its money. That’s the only way you’ll ever be able to properly analyze the company’s Profit and Loss statement. 

2. Am I comfortable with management?

Many of you wrote about trust in management as one of the key questions you should look at. You were spot on with that assertion. But how can you tell if the person pitching you the idea is trustworthy? That’s an art in and of itself, and we’ll dive deeper into that in coming weeks also.

3. What is the business worth?

Many of the companies you’ll be asked to invest in are start-ups (very high risk). Some of the companies you may seek investment opportunities in may be existing businesses (like Joe’s Pizza Parlor). Either way, you want to make sure that once you get to this part of the negotiation you’ll have a good handle on what the business is worth.

[PS–You could never determine the worth of a business if you didn’t first “understand the business”.]

4. What do I have to pay? 

Many people will argue that they invested in XYZ Company because, in their words, it was a “good company”.  But to invest at the highest level of the game, you have to be able to differentiate between a good company and a good price. Now, this is a subject that I happen to know a little about …

… and, I am not sure that these are the ‘4 question’ responses that you would have received had you asked, say, Guy Kawasaki or any other Angel or VC worth his salt.

The first two questions (do you understand the business and do you LOVE the management team?) are gimme’s …

… but, the last two (what do I have to pay? what is it worth?) are a FUNCTION of two FAR MORE IMPORTANT questions:

A. What is my EXIT strategy?

Before you go into a business, you must know how you are going to get out of it. Maybe, you won’t know exactly who you will sell to, but you will know what type of business will want to buy your business, and when (maybe not in terms of years, but at least in terms of stage of business development).

And a related question,

B. How ‘repeatable’ or ‘expandable’ is the business?

… in other words, how much can I make it GROW?

Nobody will buy your business unless they believe that they can:

(a) run it without you, and

(b) continue to grow it.

You can only achieve these if you:

(i) systematize your business, and

(ii) create your first business as though you were going to create 500 more just like it (whether you actually do or not doesn’t matter).

Don’t believe me? Check out this little snippet …

Ray Kroc paid the McDonald brothers $1 Mill. to buy them out, about FOUR TIMES what he estimated their share of the business was actually worth …

… who do you think had the last laugh in that little deal?

Add to: | blinklist | | digg | yahoo! | furl | rawsugar | shadows | netvouz
Be Sociable, Share!

9 thoughts on “The 4 absolutely vital questions to ask before buying ANY business …

  1. “you have to be able to differentiate between a good company and a good price.”

    Good advice. Hershey is a good company however they have mgmt issues. Same with Disney.

    There are a lot of good companies, however they are not all at a good price

  2. @ Moneymonk – you’re right … buying stock and buying a company is essentially the same thing – to paraphrase Warren Buffet: “you are better off buying a great company at a fair price than a fair company at a great price”. For a small business, growth potential is critical (esp. if you intend to sell).

    @ Joshua H – A subject for another post … thanks for the idea (in the meantime, word of mouth or newspapers as as good as any.

  3. Great blog yet again. For many small businesses people ask way to much. The owner is attached to his business and wants what he feels it is worth. Most are worth only dimes on the dollar.

    For me, I started a computer company in 1998, and thought I knew it all but I quickly learned so much more. I moved that store a few doors down and this time designed in the way I wanted all future stores to be like. I created systems for doing everything. Then I set out on opening more stores. By then it was 2004 and the market for computers was crashing, the wars by the big companies erased all the profits in the industry. By 2005 we were back to one store. By the end of 2007 we decided that the retail storefront was not the way to go. We moved to a much lower rent area, and just serve corporate and online customers, the ones with the best profits. The wars are over and the profits are back in the computer industry, and with our reduced cost, decade of experience we are ready to explode. All we need now is a capital infusion to get us to the next level. Even if we only get .5% of the US market that is still huge.

    Any ideas?

    Jason Dragon

  4. @ Jason – Who is your eventual buyer? Make sure you know what type of exit you are aiming for and when and aim all of your efforts at that. Setting yourself up for low-capital growth (by eliminating stores) can be a great way to go.

    I love that you “created systems for doing everything” … it was one of the keys to my business success; also, gives a buyer great confidence if they see ‘books of systems’ (even if they are largely electronic, print a Master Set off for ‘show off’ value).

    Also, if you ever decide to get back into retail and franchise, your ability to document clear operating systems will be key. Good Luck!

  5. I also usually ask why they are selling the business. Chances are they are not going to be completely honest with you if things are looking bad but, atleast you can get an idea.

  6. @ Crystalblurry – absolutely! This quesion gives you ‘negotiating power’ IF you can find the REAL reason why the owner would want to sell.

  7. Pingback: Some financial advice for the blogging community … « How to Make 7 Million in 7 Years™

  8. Pingback: 4 more questions to ask when buying a business … « How to Make 7 Million in 7 Years™

Leave a Reply