Entrepreneurs looking to buy a business often rely on their gut feeling in the first instance. Broadly speaking, there’s nothing wrong with employing your business instinct to help you weed out the less appealing options – as long as you use cold logic to assess business viability when you move to the next stage.
By taking a measured approach to assessing potential, you’ll reduce the risk of investing in a declining business and improve your chances of securing an enterprise that will deliver a good return in the months and years to come.
A company’s historical financial performance – including sales revenues, profit margins and cash flow – will give you a feel for future income potential. But it’s worth examining this information alongside general data pertaining to the business’s specific niche to evaluate what the market has in store over the next twelve months or so. Trade associations are often useful sources of information on market movements and predictions.
The next step is to analyse sales patterns to see where they could be improved. Look for trends: what products are selling to which types of customer? If the business is doing most of its trade through a specific channel, weigh up the opportunities for growth by exploring alternative routes to market. Similarly, check which product lines or services are returning the best profits: would adding additional inventory offer a simple way to expand? Are there geographical territories that haven’t yet been explored?
How much does the existing business depend on its assets – or is being held back by liabilities? If the business owes its success to a single factor, its future potential could be at risk. A trademark, copyright, exclusive deal or no-compete agreement could be challenged further down the line so check any assets carefully and work out what would happen if you lost them. Alternatively, the business might be missing a trick: does it have an unexploited USP that could be trademarked or even franchised?
Most businesses are valued according to their ability to generate profits based on their existing infrastructure. If you can spot an opportunity to expand operations into new markets or to enhance the proposition by diversifying products and services – or even just to ride the wave of an upcoming trend, you could turn a good deal into a great one.
Read more in our Guide to buying a business