What Type of Business Should you Buy? | Small Business Blog

What Type of Business Should you Buy? | Small Business Blog

May 31st, 2010 | PostAuthorIcon Author: admin

No two people will have exactly the same skills, aims, ambitions or financial resources, so it is impossible to provide a single solution for everyone. However, this article presents the key issues that need to be thought about, and will assist you in thinking it through in depth before embarking on your search for the right opportunity.

What are your skills?

All of us have skills in one area or another, and obviously your particular skills need to be taken into account when deciding on a business to buy. At the most simplistic, if you have worked in a certain type of business for someone else, say a hairdresser’s or confectioner’s for example, you probably have most of the skills needed to run a similar business yourself. If, on the other hand, you have worked in a job that has not provided you with particular skills relevant to running a small business, you will need to consider businesses that do not require skills only acquired after years of training. Consider what skills you would have the capability and aptitude to acquire quickly.

What skills and aptitudes are required?

Some businesses require only generalised skills, and others more specialised ones. It is impossible to give a comprehensive list, but here are some examples to illustrate the point. Running a small sandwich bar or ‘greasy spoon’ is very much like running an overgrown family kitchen. That’s not to say that it is easy, but learning to scale-up what you already do at home would be relatively straightforward. On the other hand, running and la carte restaurant is a totally different ball game. If you have been a chef, then fine. However, if you will have to rely on employing a chef, then you are taking a huge risk. What happens if the chef leaves overnight without warning? It would take years, if ever, for you to be able to step in and take over the kitchen at short notice.

Running a small convenience store is generally straightforward, but like the a la carte restaurant, you could not consider buying a specialist butcher’s shop unless you are trained.

Slightly less obvious is accounting requirements. A retail business, where the customer pays at the point of sale, is fairly easy to run with a simple cash book. However, if you are running a business-to-business trade, where your customers expect trade credit, then you are going to need to run ledgers with your customers’ accounts, send out statements and follow up by phone, letter and in person to chase late payment.

If it is the type of business where it is necessary to submit detailed quotations, is your English good, your maths OK and are your fingers quick on the keyboard?

In summary, when you consider types of businesses, think about how you will need to be spending your day, and whether you can manage or learn all the tasks you will have to undertake. Possibly your partner will be able to cover your weak areas.

What are the physical demands?

One factor which is easily overlooked is the physical demands that many businesses place on their owners/operators. If you have been working in an office, sitting at a desk all your working life, when you run a shop standing on your feet all day you may find that you have terrible back pains.

In the pub, when you had planned that your husband would be responsible for changing the beer barrels, if a regular is waiting for a bitter and hubby is at the bank, you are going to have to do it yourself.

All retail and restaurant/cafe type businesses, as well as many others, involve a considerable amount of physical work. Man or woman, you need to consider whether you are ready for this and whether you are going to be able to cope with the physical demands that may be involved over a sustained period.

How much risk is involved?

All businesses involve a certain degree of risk. However, some businesses are more inherently risky than others. You need to decide:

• What risks can you handle, given your aptitudes and skills?

• How much risk are you willing to take?

For the purposes of this discussion, risks can be broadly categorised as external risks and internal risks.

External risks

External risks refer to risks external to the business itself. These risks are largely outside your control once you have bought the business, and can include all or some of the following;

Location

Some businesses are very sensitive to location (hotels or general retail, for example). You can obviously check what you think of the location before you buy, but there can always be environmental changes after you have bought the business that you could not have anticipated, and which fundamentally affect the business. Your hotel, which was nicely situated on a busy road, is now in a back street due to the new bypass. The handy public car park next to your convenience store has been sold to big supermarket. It could be even simpler – the council decides to put double yellow lines in front of your parade of shops,

Technology

Changes and enhancements to existing technology could affect your business. Many small garages are unable to service some of the latest cars which have sophisticated computer and electronic systems.

New gizmos may appear and reduce the demand for your services. Digital cameras are increasingly reducing the demand for photograph development and printing, for example.

Competition

Apart from the increasing trend towards out-of-town major outlets, maybe someone will just decide to open up in competition just down the road.

Fashion

Some things just simply fade.

Customer loyalty

Sometimes customer loyalty is lost when a business changes hands.

Internal risks

Internal risks are essentially within your control, provided you have the aptitude and attention to detail to exercise it. Such risks could include:

Stock

Do you have the intuition to stock the right items, the hot sellers, or might you end up with shelves of unwanted items?

Financial control

Sometimes staff can think up the most ingenious ways of slipping cash out of the till or stock into their handbags. You need to consider which are the risks involved in the type of business you are considering, and which of these risks, given your circumstances, you are prepared to take.

Remember – if you are to be a businessperson you have to be prepared to take some risk. Why not? It could be that you are actually taking more risk by being an employee. Hundreds of people are losing jobs through no fault of their own every day of the week!

How much will the business cost?

To take the extreme, if you have a maximum of $10,000 in ready funds to invest, it is hardly worth looking at nursing homes or hotels, for example. On the other hand, a leasehold flower shop may be a realistic possibility.

Trade publications

Most businesses have trade publications. Find out which are the best ones for the types of businesses you are thinking about buying. Read a few issues. They are generally a good source of information, not only for commentary on the major concerns currently affecting that business sector, but will also contain advertisements for specialists in stocktaking, financing and so on.

Talk to business owners

It is a good idea to talk to business owners in the sectors you are targeting for their thoughts. Do not be shy about this; most business people are only too happy to talk about their business to prospective owners, as long as you make it clear that you are not about to open up nearby and put them out of business, of course! However, most business transfer agents (agents who act for owners wishing to sell their business, accountants, bank managers or solicitors can give you contacts if you prefer.

Having read this article, sit down and consider all the issues. This should give you the ideas and questions to put to them, and, as the conversation develops, the least you will gain will be confirmation that your expectations are correct. But, more likely, you will learn a lot of new aspects to running that type of business that you would have never thought about on your own.

Ask them what key factors there are to making the business successful or not. All businesses, without exception, have a few key factors that you have to get right for the business to, do well. For example, some of the key factors in the success of Pizza Hut are:

• Consistent product quality and price.

• Speed of service.

• Easy parking.

• Clean environment.

This sounds obvious, but a considerable degree of skill goes into ensuring that your pizza and chips are exactly the same whichever restaurant you go to. However, it is the knowledge that you can be assured of this that encourages you to go to Pizza Hut time and again, so it is vital for them to get this right. Other examples are:

• Pubs: (Keeping the beer in good condition; Keeping sticky fingers out of the till.)

• Convenience stores: ( Keeping the food fresh and presentation good.)

• Flower shops: (Avoiding undue wastage.)

The key factors in your particular business could concern presentation to the public or more internal factors, like financial control or avoiding undue stock losses, for example. By speaking with existing owners you should gain a good feel for what these critical factors are, and be able to assess whether you have the ability or willingness to make sure that you get them right.

Consultancies

Businesses such as insurance brokers, advertising agencies, graphic designers, IT consultants are often built up through personal relationships that go back over a long time. The same applies to hairdressers. As such there is often a real risk that once the current business owner leaves, a significant number of clients will decide it might be a good time to look around at alternatives.

In many such businesses there is a similar risk in relation to key employees. Instances where employees leave, either to start on their own or to join a competitor, and take clients with them, are commonplace. Practices such as graphic designers or advertising agencies, for example, where the employee works very closely with the clients and has an in-depth knowledge of their likes and dislikes, are particularly vulnerable in this respect. Often if you lose the employee you lose the client, even if the employee doesn’t take the client with him, because it was solely for the skill or imagination of that employee that the client used this firm.

If you are thinking of buying a business of this nature, you will need to consider these risks very carefully and, if necessary, consider ways in which you can reduce them. You may need to contract the vendor to stay on in an advisory capacity for a period after take-over, and/or incentives key employees. You could also consider negotiating to defer part of the purchase price, making it only payable if sales meet projected targets over, say, the first two years after takeover.

It is never possible to eliminate the risks entirely and for that reason these types of business rarely sell for high prices unless they are large practices where the risks are widely spread over a large client base and workforce.

Unless you are experienced, you should obtain specialist advice about valuing such businesses and negotiating contractual terms. The relevant professional institute should be able to offer help in this respect.