It’s exciting to buy a new business. However, it’s very important to be realistic about future growth. In most cases, if a business is poised to quickly grow substantially, the seller would be far less interested in selling.
When evaluating a business and talking to the owner, many buyers come away with a sense that enormous growth is just “sitting there” waiting to be seized, writes Richard Parker, President of Diomo Corporation – The Business Buyer Resource Center. In a recent article for Forbes entitled “Don’t Be Delusional About Growth When Buying a Business,” Parker seeks to instill a smart degree of caution into prospective buyers. Parker, who works with investors buying and selling small businesses, says buyers should be very careful if they are buying into an industry that they know nothing about.
Buying into an industry you don’t know comes with a lot of potential problems. The opportunities that you see may not have been tapped into by the existing owner for many reasons, Parker says. Without knowing more about the industry, you’re unlikely to spot those problems. Since you are an outsider, you likely lack the proper perspective and understanding. The seller may have already tried and failed at the growth opportunities you’ve identified. Until you actually own the business and are running it on a day to day basis, you can’t make a proper assessment of how best to grow that business.
The seductive lure of growth shouldn’t be the determining factor when you are looking for a business. A far more important and ultimately reliable factor is stability. “The key question to address is whether or not the business will maintain its revenue and profit levels after you take over,” Parker advises. A business that doesn’t have to grow to remain viable is a better value.
As Parker points out, the majority of small business buyers will buy in a sector where they don’t have much experience, and that is fine. It’s more important that the buyer “has the core skills to operate and drive the business than having direct industry experience.” What is not fine is paying a lot for a business because you believe you can greatly grow the business. If you can, that’s great and certainly icing on the cake. But Parker says you shouldn’t depend on that growth.
In the end, everyone has some ideas that work and some that don’t. You may take over a business and, thanks to having a different perspective than the previous owner, you find ways to make that business grow. Just realize that many of your ideas for growing the business may fail completely.
“To be a successful business buyer, your approach has to be effective, realistic and practical,” Parker says. “Don’t fall in love with the business or fall prey to your own sales job. You have to evaluate all scenarios and adopt the philosophy that stability is a top priority.”
A professional business broker will be able to help you determine what business is best for you, and to determine a fair asking price for that business. A business broker will help keep you focused on what matters most and steer you clear of the mistakes that buyers frequently make when buying a business.