How to Research a Business Opportunity

Evaluating a Potential Opportunity

In the preceding section, we outlined numerous things you should do to ensure that you're choosing a venture that will be appropriate for you personally, and will represent a sound investment. It's important that you cover all your bases before signing a contract with the seller. The following are some strategies you should use to protect yourself.

  • Have legal representation. Your attorney should be present when you're negotiating with the licensor-seller. At the very least, your attorney should go over the contract to purchase the business opportunity and advise you as to whether or not you should sign it in its present condition. He or she should explain what each aspect of the contract means so that you understand what you're signing.
  • Have financial representation. Your accountant should look over the financial statements of the licensor-seller. In addition, he or she should be able to check out the financial strength of the company and determine whether the business is a viable financial investment for you.
  • Make your own independent survey of other owners of business opportunities sold by the parent company. Are they happy with the company? Did the company do everything it promised? Is the company good to work with? Does it give its distributors help? Does it send out advertising materials? What do they feel are the strengths of the opportunity? If they had to do it over again, would these licensees buy another unit? Would they advice you to buy a unit?
  • Contact competitors. This will verify the status of the company in the industry. A competing company will tell you in a hurry what the company's weaknesses are. You'll also get an opportunity to see whether or not the business opportunity compares favorably in terms of pricing and so on.
  • Check the credit of the seller. Your accountant or the person auditing the business opportunity can help you with this.
  • Be sure you understand everything you're signing. Read the disclosure statement, the purchase agreement and the advertising bulletins carefully.
  • Check the credibility of the parent company. The parent company doesn't have to be big in terms of dollars to be credible. Use your common sense and advice from people you trust to determine whether or not a company seems credible. In many cases, small companies are a great investment for a buyer because you generally deal with the president or the top people in the company. They are going to be training you and working with you. This is a tremendous advantage, as opposed to working with somebody five or six rungs down the ladder who may be just doing a job. Are the seller's people truly interested in you? Do they seem to be sincere? Did they check you out thoroughly? Are they concerned with the kind of buyer that will be carrying their banner? This is very important. If they're just interested in taking your money, you're in trouble.
  • Check the performance of the parent company. Are the seller's claims backed by performance? Do the claims that the seller make when advertising their product, for example, stand up at the store level? Do the current operators you've talked to confirm the profit claims that the seller makes?
  • Check the company's management. It's not enough that they've got a good idea. Do they have the management strength to be able to train you, help you and keep the company running for another 20 years?
  • Know all the costs and obligations, both yours and the seller's. What costs are you going to have to incur? What are your obligations on an ongoing basis?
  • Is the company going to train you? Is training at your own expense? In most cases, you have to pay your own expenses to the training site. How long will the training last? Do you have enough money to sustain yourself while you're in training and before your business starts earning money? What kind of ongoing supervision will the company give you?
  • Determine what type of advertising program is available from the licensor. Will that advertising program work for you? Check your local market. For instance, if you're buying a business opportunity in which you'll be selling bathtub liners, will advertising in trade magazines really help? Also, what are their ads like? Is the copy good? What about visual art? Don't negate the possibility that their advertising program will hurt you more than it will help. Just because you're dealing with a company that has experience in the field, their marketing campaigns aren't necessarily going to be successful.
  • Are you getting value for your initial purchase price? Examine the list of equipment, fixtures, inventory, operating supplies, etc. and call a few suppliers dealing in these items. Compare the prices those suppliers quote you against the business opportunity's prices. You may be able to purchase everything, including the inventory, for less money yourself than you could by affiliating with the licensor.

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