This post originally appeared on startupnation.com/start-your-business
The market looks vastly different than it did a year ago, which means new opportunities — for better or worse. As businesses reopen, they offer clues to which industries proved to be pandemic-proof, meaning they were hit hard but show strong promise of recovery, and which ones appear gone forever. If you were already researching businesses to buy as well as methods on buying a business before the world went on hiatus or you find yourself looking at a brand-new career landscape post-pandemic, you’ll want to read our checklist.
Ask yourself these questions to clarify whether it feels like your time to consider taking the plunge into entrepreneurship by buying a business:
Do you have the energy and interest?
- Do you like this market? If you’re going to invest the next decade or more in an industry, it helps if it’s aligned with your passions.
- Is it a strong market? How is this industry faring currently, and what are the predictions for the years to come? Explore what’s realistic to expect from this business while the market is still not completely open and whether you can maintain long enough to scale up.
- How professional is the company’s existing management team? How have they responded to the current crisis? A mature team can handle most day-to-day operations and decision-making and offer owners invaluable strategic support.
- How hands-on do you want to be? Some transactions are best served when the contribution is a capital investment, paid back through dividends or interest payments (as in minority/non-operator shareholders) rather than running the business.
- Are your skills better used striking out on your own or helping manifest someone else’s vision? If you prefer to concentrate your efforts on one area or you are not sure you have the drive to go solo, look for a business that can benefit from a passionate new partner.
Is it worth your investment?
- What do you need from the business? Think clearly about the outcomes you want, including regular financial payouts, social and environmental change and work-life balance.
- If the price tag is too high, can you finance through borrowed revenues? This can be risky, so evaluate carefully so your debt doesn’t create issues when sales are uneven or in decline.
- Does maintaining your lifestyle depend on cash flow? In financial theory, a business is worth the discounted cash flow through time. In your business plan, work out whether you will rely on cash from operations. Financial returns can occur monthly if needed for living or be reinvested and realized when the company is sold.
- Do you intend to grow the business? Explore whether expanding requires further investment or other financial support. Expect costs that exceed your original assessment, and ask yourself whether the purchase meets your comfort and stretch price point.
Will your skills ensure success? Would you benefit from collaboration with partners?
- Where should you focus your energy? Identify what you love to do (and do best) to distinguish and prioritize that over what you are simply used to doing or can do.
- What kind of headcount would you need to run the business successfully? Most sizable companies need expertise in sales, marketing, technical knowledge, accounting, finance and operations — typically skills beyond one person’s knowledge base. Even career business owners benefit from pooling skills.
- Can you bring in collaborators with skills to complement your weaker areas? If not, perhaps you can acquire expertise from the market or work alongside complementary businesses.
- Is a smooth transmission of business information assured? You’ll want some time with the owners to transfer knowledge and ensure an efficient takeover.
Can you see an exit strategy?
- How do you plan to sunset the business? Know when your opportunity cost is simply too high so you can enjoy the next phase of life you have worked for.
- Does the company need to grow and stabilize before you can sell it? What size company might bring the best multiple (the amount of money paid for a company compared to its financial returns) at the sale? Typically, this would be the price paid compared to EBITDA (earnings before interest, taxes, depreciation and amortization). A higher EBITDA will, all things being equal, receive a higher multiple, providing better returns for a buyer.
- Who are the strategic and financial buyers in your industry? A strategic buyer will pay a premium.
- When it’s time to sell, what would be your walkaway price? Take time to properly evaluate so it’s worth your while to sell the business you have paid for and worked to improve.
If you answered “no” to any of the question categories above, perhaps you’re sensing that buying a business is not your path to fulfillment. That’s valuable information, too. Let that clarity reconnect you to the forces that do compel you.
As visionary businessman Buckminster Fuller said, “Don’t fight forces. Use them.” For those who hear the call in these unusual times, buying a business may be a rewarding way to mold your career vision. But thoroughly consider market forces against your interest, means and skills so you choose a business and craft a long-term plan that supports your growth and development goals — before you jump.
The post 4 Important Questions to Ask When Buying a Business Right Now appeared first on StartupNation.