On Oct. 27th, Treasure Valley SCORE sponsored its third annual Coaching and Workshop Event. One of the workshops discussed the considerations involved in buying a business. The workshop was conducted by Kip Moggridge of the Arthur Berry & Co., specialists in the purchase and sale of businesses.
The workshop focused on key things you probably dont think of when you are buying a business. Moggridge offered these points:
1. Look for liquidity. What can the assets be sold for, should that become necessary? Can you afford to lose much of your investment?
2. Look for capacity. What are the earnings at the overall capacity and assets available at this location? Will additional investment be needed if the business growth is 20 percent or more?
3. Look for a fair return on your cash investment. For your investment risk, you should receive more reward than investing in safe investments such as bonds or CDs (less than 3 percent) or investments in real estate (7 percent to 15 percent). Business investment should have returns in the 20 percent to 100 percent range, depending on the risk.
4. Look at your time. Can you stand being engaged in the business for at least three years? It may take three years for you to assess the earnings potential of the business.
5. Look at where your business stands in the scope of all businesses. Will you be selling products or services customers need, or what you and some customers think they need? Are your products and services me-too, or do they offer a distinctive advantage in the marketplace?
6. Look at having an out-plan as part of your buy-in plan. What will you do if your investment isnt achieving the returns you expected? When do you sell, and what will you get when you sell or liquidate? While you should remember the three-year plan discussed in No. 4, you must watch your numbers. If your business cannot produce sufficient earnings, you should get out when recovery is no longer realistic. Three years may be too long to wait.
7. Look, look and then look again at location, location, location. Be wary of what the seller is selling you on. Rent and capital costs can kill your drive quicker than anything else.
8. Evaluate the business using two independent variables:
The amount of funds you have available to invest in the business without betting the farm. Do you cash in your IRA, your retirement funds and use the entire equity of your home? Using your 401(k) is typically too costly to consider.
The amount of money you need to live on. Suppose you pay $100,000 for a business and net profit before your salary and taxes is 50 percent. Is $50,000 pretax enough for you to live on?
When you think about buying a business, seek help. A licensed business broker is a good starting place. Its worthwhile to have a CPA review the financial history and an attorney review the sales agreement. These minimal expenditures will reduce the investment risk.
A special thanks is extended to Kip Moggridge for his insight.
C. Norman Beckert, Idaho district director for SCORE, the Service Corps of Retired Executives. email@example.com