6 Crucial Considerations Before You Buy a Business (as a Shortcut to Starting From Scratch)
Acquiring a company can be a fast-track to profits, but it can just as easily thrust you into a dishearteningly expensive uphill battle. Here are six crucial considerations that can save you from betting on the wrong entrepreneurial horse (and losing it all in the process).
Have you ever wondered if or wished there was a shortcut to launching a business without the months of trial-and-error that plague most entrepreneurs? What if you could become a CEO overnight for a real, thriving company? Believe it or not, with a little bit of capital, you can. This strategy is what I like to call being an "acqui-entrepreneur" — in other words, you're an entrepreneur through acquisition. While acquiring an attractive, but affordable business might seem like the no-brainer shortcut to achieving your startup dreams, there are plenty of perilous pitfalls to look out for before paying your way into CEO-dom. The last thing you want is to drain your savings buying a problem you don't know how to solve. Here are six key considerations before saying "yes" to a for-sale startup:
1. Where's the traffic from?
One of the main advantages of buying an up-and-running business is the existing customer base or source of new leads and traffic flocking to the store or website. However, having traffic or sales history is just one checkbox. A wise potential acquirer will want to know who, what and where those traffic sources are coming from. Are they all word-of-mouth? If so, that's a major red flag. While it indicates the customers are happy, it also implies the company doesn't know how to market and generate their own new leads and sales. Is all the traffic coming from one social platform, partner,or ad manager? If so, this lack of diversification might create a vulnerability. What if that singular traffic source disappears overnight or slowly wanes in effectiveness? You could be left starting from square one with a ghost business you don't know how to revive.
2. Are there any industry or marketing restrictions?
You don't have to sell a risky, black-market or salacious product to run into marketing restrictions. Even the most wholesome of products and industries can experience platform bans or advertising upsets that significantly limit the ability to market those products. Do your research, and determine how and where competitors are currently marketing this product to prepare yourself for any widely known hurdles. For example, selling innocent weight-loss products can come under fire as offering dangerous medical or health advice, quickly banning ads and restricting social media accounts if done incorrectly. Forewarned is forearmed.
3. What's the ROR (Rate of Returns)?
One thing too few entrepreneurs brace themselves for is the possibility that 100% of your customers might not actually be satisfied with their purchases. Encountering your first product return or service refund request is one of the most shocking and devastating moments in most founders' careers. However, most companies experience more than one return in their lifetime; in fact, some industries are rife with obscenely high return, refund and dispute rates. Before buying a business, take a good look at their historical rate of returns as well as the industry or selling platform's standard rate. The last thing you want is to assume your $100k sales month is 80% profit before realizing you have to return 50% of that to unhappy customers.
4. Is there seasonality? Can you explain the ups, downs and outliers?
If you're selling chocolates, it might be obvious that February (Valentine's Day) and October (Halloween) should incur spikes in sales. But sometimes the ups, downs and seeming outliers don't have such obvious explanations. Before you buy a business with volatile sales — or even just a temporary sales desert — be sure to investigate why. There may be a reasonable answer, like a new competitor's simultaneous product launch or an industry-wide upset. However, the answer could be something far more nefarious or concerning, like the seller's ad account disabled or an industry banned from its primary marketing platform. Volatility is one of the hardest pills for entrepreneurs to swallow, but you'll feel much better and more equipped to face it if you have the answers behind those ups and downs.
5. What are the ongoing operational (and marketing) costs?
Too many aspiring entrepreneurs believe business problems can be solved by a few social media posts or throwing $20 at your ad spend budget. In reality, there are many costs you might not foresee, as well as the possibility that effective marketing is far more expensive than expected. If the business currently spends $2k a month on operations and $5k a month on marketing, you should be prepared to set aside at least three to six times that for your operations and marketing as you transition to becoming the new owner and operator. The last thing you want is to start off strapped and doom your new venture due to waning cash reserves.
6. Why are they selling — and does it make sense?
Let's be honest: If a business owner is willing to part with their baby, there's probably a good reason. Sometimes that reason is perfectly acceptable and of no concern to the future owners; reasons like this include a non-compete after another business sale that prevents the owner from continuing operations or another company taking off and requiring all of their time. Many times, however, the reason foreshadows current or future obstacles the new owner (potentially you) might encounter. Reasons like an owner running out of money or looking for someone to inject new enthusiasm into the business toe the line into far more concerning territory. If a company is low-maintenance and cash-flowing — or even higher maintenance but supremely lucrative — few owners are eager to sell at anything other than an outsized (expensive) valuation. A cheap business for sale could be a bargain or a lemon. You'll want to investigate as much as possible before wiring over your offer price to find out.
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