Buying a business is a rewarding yet daunting task. You may find yourself having to invent solutions to overcome hurdles that you never thought would exist. When first considering a purchase, I believe some best ways to lower potential hurdles is through an honest assessment of that business’s stage of its life cycle, its operating cash flow, and the quality of its assets. Your conclusions may determine just how difficult or rewarding that purchase will become.
Businesses can exist in one of four phases: start-up, growth, maturity, or renewal/decline. Each phase has unique risks, potential outcomes, a competitive landscape, and an overall worth/valuation. Make sure you know which phase you find this business to be in as that will shape your business plan, counteroffer, and investment/financing options.
Most have heard the phrase “cash is king”, and stress-tested cash flow projections (prepare several scenarios) will decide how you proceed with your investment. How does projected cash flow and return on your investment compare to other options, such as the stock market and competitors? Be sure that your projected rate of return can beat the riskiness of unknown hurdles.
Does the quality of the business’s assets support the price being offered? You may need to plan for additional, short-term costs that could even be used to negotiate a lower price. Assets are not just inventory and equipment, but also include the workforce, business records, customer base, technology, and the reputation of the organization.
Jeff Wood, CPA, MBA
Vice President, Intrust
This article was originally published in the July 2020 edition of SCORE Traverse City’s BizSuccess Tips. To subscribe to their newsletter or find a business mentor, visit them here.