If you can’t beat ‘em, buy ‘em.
Buying the right business can be a great opportunity, but buying the wrong one can wind up the costliest mistake of a lifetime. For guidance on how to determine whether a given business is a good one to purchase, I turned to Vincent Forgione, a Woodbridge-based entrepreneur who has bought businesses, sold them, and — through his consulting practice — helped others do the same.
Forgione is quick to note that while he has experience in this field, he is neither an attorney nor an accountant; he recommends consulting one of each before executing a business deal.
During our conversation, Forgione offered a number of techniques for assessing whether a given business is a smart buy. In this column, I’ll include three of the questions he recommends an entrepreneur ask herself as she considers whether to buy a particular business.
Is the business doing as well as the owner says it is?
A business’s asking price is based on sales, so the owner has every incentive to make a struggling business seem lucrative. Depending on his accountant’s creativity, the business’s financial statements might corroborate his inflated claims. The potential buyer’s job is to try and determine how much the firm actually earns in a given year.
Is the owner 100 percent of the good will?
“Good will” is the business’s reputation with customers. It can be the most valuable asset a buyer acquires in a business deal, but it sometimes evaporates with the previous owner’s departure. “Take a barbershop, for example. The customer will want the same barber,” Forgione said. Although the shop’s revenue might make it seem like a valuable business, sales will likely dry up once the beloved barber leaves the building.
How long will it take to recoup your investment?
Because dreams – and unbridled optimism – play as large a role in business deals as numbers, it’s easy to let emotion supplant reason. But it is important for an entrepreneur to put her accountants’ cap on when deciding whether to purchase a business.
To estimate how many years will pass before she recoups her investment, an entrepreneur must divide the amount she pays for the business by the amount of net profit she thinks it will earn each year. Hint: she should base her yearly net profit estimate on what the business has earned previously, not what she hopes in her wildest dreams it will earn in the future.
Forgione offered two simple but effective ways to perform a reality check on the business’s sales.
First, count the heads. “Park outside the place at various hours and see how many people go in,” he said. Then, he said, figure out the average amount of money a single customer spends per visit, and multiply that number by the amount of customers the business serves in a given day.
Second, Forgione said, talk to suppliers. The baker who sells a restaurant its bread, for example, will be able to tell you how good the owner is at paying his bills on time. If the baker complains of frequent late payments, there’s a good chance the business is struggling.
Forgione said he would be glad to respond to readers’ questions. Feel free to send them to me and I will forward them along to him.
Handshake photo by Aiden Jones