Buying an existing business is often easier than starting from scratch. But scratch you must to dig up relevant information that may not be readily offered by the existing owner or business broker. Before making any important decisions, check the numbers and ask pointed questions.
- Study the financial records provided by the current business owner, but don't rely on them exclusively. Instead, insist on seeing tax returns for at least the past three years. Also ask for the sales tax records, where applicable.
- Find out how the owner determined the asking price. Together with your accountant, decide whether assets and expenses were realistically valued. Business owners often assess outmoded assets overgenerously or fail to recognize changes in the neighborhood and their impact on property value.
- Who are the employees? In a family operation, salaries may be unrealistically low, resulting in a bottom line that's unrealistically high.
- If you plan to change the image of the business, will the current inventory still be valuable to you? How will changing the business impact the existing customer base?
You may not be able to answer all these questions satisfactorily, but addressing them can guide your decision to pursue the purchase and give you better bargaining leverage.
Spy Vs. Spy
Even if your business is profitable, you may be suffering losses--the kind that stem from crime. Such losses can destroy even the healthiest business, but fortunately, most are preventable.
Beverly Hills, California, security and investigative consultant John Dresden has operated Probe Inc. detective agency since 1974. Though Dresden carries an impressive array of security equipment at his 4-year-old Spy Tech Agency, he says, "There are protective measures you can take that don't require large cash outlays."
Start by enrolling in a crime prevention class for business that teaches you how to spot shoplifters, how to handle cash and more. Call your local Better Business Bureau or chamber of commerce for more information.
Good locks are a must to prevent burglaries, says Dresden; they should be rekeyed if you have employee turnover.
Mount a visible, realistic-looking dummy camera and post signs warning would-be offenders that the premises are protected by a security system and a neighborhood patrol.
Protect yourself from customer theft with prominently posted signs notifying shoplifters that you will prosecute. "These things seem trivial," says Dresden, "but they are inexpensive and effective."
Show And Tell
Infomercials are more than just a great way to sell a product. "[They're also] one of the most effective tools in generating consumer demand to get your product into retail stores," says Tim Hawthorne, an infomercial industry pioneer and author of The Complete Guide to Infomercial Marketing (NTC Contemporary Publishing, $60, 800-323-4900).
There's a catch, of course: Infomercials are expensive. Hawthorne, whose Fairfield, Iowa, company, hawthorne direct, specializes in creating, producing and managing marketing campaigns, says producing and airing a 30- to 60-second test spot for one week costs between $25,000 and $40,000; running a longer national spot costs another $100,000 per week.
Fortunately, there's an alternative. An infomercial or direct-response TV marketer may be willing to buy your product wholesale or pay you a royalty based on a percentage of sales. In return, they put up the entire cost of the production and campaign.
To find such companies, Hawthorne suggests combing ads in trade publications such as Response TV or DRTV News. You've got the best chance of striking a deal if your product is a unique item that has mass appeal, solves a common problem, can be easily demonstrated, and costs less than $50 with a markup of 500 percent or more.
Marketers are attracted to infomercials that test well because they're virtually guaranteed to make back every dollar spent for advertising. The bonus for you: A successful infomercial will generate a flood of calls from major retail chains seeking your product for their shelves.
Hawthorne Direct, 300 N. 16th St., Fairfield, IA 52556, (515) 472-3800
Probe Inc., (310) 657-6333, http://www.spytechagency.com