San Diego, California USA - Would you buy or invest in your own business? It’s a fair question. Would you invest in your own business if you were not already involved in the business? Would you currently be attracted to the industry? Is the industry’s outlook that promising? Are your customers prospering or is there continuing downward pricing pressure on both the customers and your business? Can you honestly assert that capital invested in your business, under your control, is one of the best investment opportunities you can think of? If you were a fiduciary, investing for others, would you invest in your business?
If you hesitate to answer the last question affirmatively then the next question is what can you do in managing the business, assuming you have adequate capital, to make it an outstanding investment opportunity? Businesses succeed, fail or zombie-like hang in limbo, all based upon the implementation of management decisions. What can be done to make the business more attractive to you and therefore to possible investors? There are many different questions which have to be contemplated and addressed before reaching any conclusion as to the relative attractiveness of any business.
Is yours a business or is it really a practice? Practices are personality extensions and tend to have less value than businesses which are not personality dependent. In its present operational and capital structure would the business survive your immediate and unexpected retirement or demise? What would be needed to assure a continuation of the business were you not to be involved? What can you currently do to achieve an assured continuation of the business? Can the necessary long term capital be acquired on satisfactory terms, permitting the business to prosper? What are the additions to management which are necessary and can the business currently afford to attract and recruit the needed parties? What are the financial and possibly ownership arrangements which would have to be made? Do you know of those who could replace you effectively? Are you already in contact with some of these people? Would you try to attract people from outside of the business or are there those already in place? Do you have family members involved in the business and would these be people you would have in the positions being held were they not family members?
What is the primary attraction of your business for an investor? Does the business have some unique elements which assure its growth and success? Is it likely the business will grow faster than the industry it’s in or is it simply a reflection of the industry? Are there better ways to play the industry and is the outlook for the industry really so positive? Does the business generate profits which can, through dividend declarations or other mechanisms, be distributed to the owner’s of the business? Will the business, if adequately financed, grow to become a much larger enterprise in a realistically predictable period of time? How big and how long? Will the fortunes of the business be much different than that of competitors and if so why?
What are the weaknesses of the business which an experienced and probably therefore skeptical buyer of businesses will first identify? Has the business been able to maintain and even increase profit margins? If not, what are the steps which can be taken to expand profit margins? What has been the trend of revenues per employee? This ratio is a good measure of managerial flexibility and effectiveness? If you, as a profit focused buyer, were to buy the business today which of the key employees would you keep and which would you terminate? On which of the business’ customers would you focus more attention? Which of the customers would you no longer serve without a change in the relationship?
Are the problems a new owner of the business would face subject to correction? Specifically, what can be done currently to fix the problems? Listing the profitability impacting problems and possible solutions, assuming the necessary capital was available, could be constructive both in managing the business and attracting capital. In all cases, the use of capital is justified by the return which is earned as a result of employing the capital. What would be the return on investment for the funds utilized in achieving the problem solutions?.
What are the personal and professional characteristics of the ideal buyer of your business? What type of business buyers are most likely to not have any interest in your business? Is yours a business which will best or most likely be bought by a competitor, supplier or customer? Are there enough company and industrial segment pluses for a buyer not already involved in the industry to be attracted to the opportunity?
What will you answer when the question arises as to why you are interested in selling your business? How truthful will your response sound to an experienced buyer of businesses?
What guarantees are you prepared to offer a buyer? Are you prepared to attest to the validity of the financial statements? Will you guarantee that your key people will stay for an agreed period? Are you prepared to financially and otherwise assist the new owner of the business in retaining key staff? If the key people do not stay will you reduce or adjust the valuation of the business? Will you guarantee that your major customers will continue to do business with the company assuming the same level of product quality and service? Are you prepared to guarantee minimum levels of future annual revenue and/or profit in order to obtain a higher valuation for the business?
What will your most direct competitors tell a prospective buyer about you and your business? What will your customers say about you and your business? Will your vendors say good things about you and your business? If the answers are less than desired what can be done to change the attitudes and observations?
What would be necessary for you to find it acceptable for you to sell 50% of the business and retain 50% while continuing to manage the business for an agreed period of time, giving the buyer an option based upon profit level achievement to acquire the remaining 50%?
How did you reach the decision as to the valuation of the business? Did you base the valuation on professional appraisal or advice and, if so, are you willing to share documentation with a prospective buyer? What alternative uses of the buyer’s capital did you consider and compare as to risk level and prospective Return On Investment??
As is always the case, stepping back and putting yourself in the place of those with whom you are dealing is a constructive exercise, What questions would you ask were you to be in a position of being offered the opportunity to buy a business in an industry about which you knew little? What makes the opportunity really attractive, perhaps to the point of being compelling and therefore assuring a completed transaction?
The manager of any business can improve the operation of the business by answering the above questions and making an ongoing attempt to view the business through the eyes of a prospective acquiror.
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Contact: arthur@pobox.com
Author/Correspondent's Profile: Arthur Lipper III, Chairman, British Far East Holdings Ltd.
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