Sunday, March 21, 2010

Thinking about Buying a Business - Answer these Questions

At face value, the life of an entrepreneur may seem glamorous. You run the show, make your own hours and don’t have to answer to anyone but yourself.

Unfortunately, it does not always work in your favor. It often takes hard work and determination to create a thriving business poised to become the next big success story. Before rushing out to buy a business, new entrepreneurs would be well-advised to take a step back and consider five important questions prior to jumping into business ownership.

What Are My Strengths and Weaknesses as an Entrepreneur?
Do you really understand your strengths and weaknesses, and how those compare to the norms for successful entrepreneurs? The skill set of successful entrepreneurs, which has been studied and modeled for many years, requires more than a just a well-rounded background consisting of functional and strategic experience. Knowing your strengths and weaknesses, as it specifically pertains to business ownership, will typically guide you towards acquiring a business that showcases your assets while at the same time downplays your limitations.

On the other hand, it can help gauge what kind of support may be required in a co-owner or business partner. For instance, if you have a high numerical aptitude coupled with low numerical reasoning, there’s a strong likelihood you can manage the books and records of your business -- but may need assistance building business models. This serves as only one of countless examples that demonstrate the importance of assessing your skills.

It's tough to be objective when assessing your strengths and weaknesses. As such, it may be worth investing in a third-party Entrepreneurial Assessment. My business brokerage firm works with an industrial psychologist who conducts Entrepreneurial Assessments of would-be business buyers. The feedback we get from the buyers is that these assessments are very helpful in streamlining their path to business ownership.

As an unbiased, scientific assessment of your skills and background, Entrepreneurial Assessments can give you a snapshot of how you might succeed as an entrepreneur, as well as what type of businesses would best suit you.

What Is My Tolerance For Risk?
To reference an overused but oftentimes ignored cliché, small business ownership is not for the faint of heart. Even under the best of circumstances, steering the ship of a small business takes a healthy combination of intelligence, hard work, perseverance and sheer guts. Unlike what many new entrepreneurs anticipate, there is no such thing as a day off.

All business decisions require your complete involvement, as any capital investment is either coming out of your pocket, or you are guaranteeing the loan. Sleepless nights and the feeling of living on the edge can easily permeate your lifestyle unless you practice counter-balance measures.

If you are easily troubled and the worry paralyzes you, it may be wise to think twice before buying or starting a business of your own. It’s imperative you understand your risk thresholds, as well as those of your family or significant others, prior to taking the plunge into entrepreneurship.

What Is My Financial Profile?
It is absolutely critical to fully understand your ability to financially leverage the purchase of a business.

As lending has become difficult amidst a struggling small business economy, what works one month may not work the next. Your comprehensive financial profile should take into account not only your personal net worth, for example, but also the other factors banks are now considering when processing loans.

A contact of mine who works with buyers to secure loans for business acquisitions, recapitalizations and debt restructuring recently mentioned how he urges today’s business buyers to complete a lending profile prior to embarking on a business search. A lending profile will ultimately guide you on a more focused search, giving you information about the size and type of business you can afford to purchase, its cash flow requirements, working capital needs, the most appropriate investment vehicles and a pre-approval for lending you may need. The latter can give you a leg up with sellers, as they receive comfort in knowing you are indeed financeable.

What Type Of Business Is Best Suited To My Talents?
Buying a business is your opportunity to do what you love, so your passion for the specific industry should be one of your primary objectives when looking for a business. Nearly all of the 350 new buyers who seek help from Chicagoland Sunbelt each month, for example, are focused on the cash flows of a particular business over the type of business. A high percentage of these buyers are middle-to-senior level executives who are attempting to buy a business to replace lost income.

It’s usually a good idea for new buyers to engage in a brief educational session surrounding tactics involved in business acquisition. During these sessions, buyers learn the steps involved in buying a business and the first rule of focus: concentrate on your career goals first, and worry about the financial benefits second. If you cannot say you would love running a particular business, skip it and keep looking.

In fact, the process of buying a business could last anywhere between six months and two years. New entrepreneurs are lucky if they find something immediately. More often than not, you are turning over many stones to find the prize. Don’t let the long process discourage you from finding the business that truly meshes with your career goals, passion, personality and core strengths.

One of the best ways to know where to focus your energies is to think about all the jobs, tasks or situations throughout your career that seemed effortless. We have all been in situations where work did not seem work -- you could not wait to get up in the morning; you put in extra hours; you collaborated; you had tons of energy even though you were working harder than usual; and everyone around you knew you loved what you were doing. Think about those moments and then compare the attributes of a particular business to those situations. Once you find a business that invokes this type of passion within you, commence your due diligence to test your assumptions.

It is hard work and you may have to recalibrate along the way, but there’s a good business out there for every personality and skill level.

Who Are My Advisors?
From day one, assemble a competent team of advisors who are skilled and committed to the business-buying process. Your team should include an attorney, accountant, banker, insurance advisor and business broker. All of these professionals should be highly skilled in business acquisitions.

While many professionals will tell you they understand the work of business acquisitions, there are few who make it their living to focus solely on this type of work. This is an important distinction since buying a business is fraught with many challenges and obstacles. It is easy for an unskilled professional to tell you to walk away from an opportunity that might be ideal for you.

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