What do you look for when you want to buy or start a business?

Investors tend to select a business to invest in from emotional rather than rational criteria. For example, they might say “I can’t see my self doing …” or “There’s no way I would do …”.

From our experience in operating businesses, starting up new businesses and helping clients expand their existing business, one of the best ways to identity a good business to invest in is by what the author Stephen Covey describes as “starting with the end in mind”. It is important to take a step back and visualise what you want to achieve before you even get started. Thereby, once you get started, you will have a higher probability of achieving it.

When a client approaches us with an idea to setup a new business or invest in an existing business, we will always discuss with them the “9 Ideal Features in a Business”.

The “9 Ideal Features in a Business” is just that …. IDEAL – IDEALISTIC.

We came up with these Ideal Features one day when we posed ourselves a simple question …. if a good business opportunity came across our desk one day, what kind of business would it be?

The following dot point summary is what we came up with and the reasons why :-

1. Cash business
– don’t want to have debtors
– don’t want to chase customers for payment
– businesses go bankrupt because customers don’t pay when they are supposed to, yet creditors demand payment immediately
– want to receive income in cash
– want the ability to pay creditors on terms (ie: 30, 60, 90 days)
– great on cashflow

2. A ready market & strong demand for your products or services
– Having a ready market and strong demand for products and services means you should have a Regular and Steady Income which require little or no marketing
– Theoretically you can “setup a shop and sit and let money come to you
– Running a business is hard enough, you don’t want the added stress of continually worrying about getting customers to cover overhead costs, etc
– Any extra marketing that you do choose to do isn’t driven by survival but for  growth
– Making money should be simple and easy. There is a saying “when you want to climb a mountain, do it on a sunny day, not a rainy day”.

3. Expandable
– This is the ability for a business owner to capitalise on the existing infrastructure of the current to generate additional income
– This could be through “spin off businesses” or “marketing innovation”
– This concept of expandability is based on a quote attributed to Albert Einstein  “Insanity: doing the same thing over and over again and expecting different results”.
– If a business owner inspires to achieve greater results from the business, he or she will need to do something different.
– Likewise, if a business wants to achieve a better result than other businesses in the same industry, they need to something that the industry as a whole isn’t doing
– The marketing guru Dan Kennedy regularly talks about how a business can create simple marketing breakthroughs by “borrowing ideas from a different industry”
– The ultimate responsibility of a business owner is to control the marketing function

4. Not restricted by specialised skills & training
– Tongue in cheek “a business which even a monkey can do”
– When I reminise back in the days when I worked in McDonalds, I now appreciate the SYSTEM which they had developed. They had a perfect system whereby at the crux of it all you had a business owner who employs an 18 year old who manages a group 15 year olds who has no prior experience in making hamburgers!
– A business which you can only do if you have specialised training or 20 yrs worth of experience is a very difficult business to grow. It’s very difficult to duplicate yourself. You just run out of hours in a day.
– If you want to expand you need to hire and train employees to run the business

5. Simple operations & systems
– A system for a business owner is ultimately the ability to employ staff to replace yourself
– World renowned business guru & author Michael Gerber coined the concept of “working on the business not in the business”
– A simple system is how you achieve this

6. Owners Profit
– Money is important
– Not only must the business be able to meet your current needs but there should be enough of it to reinvest in the business to expand and grow

7. Must be creating an asset
– To laymen, an asset is something which has a value and you can sell
– For many business owners, you build a business which you ultimately want to sell to someone for a profit
– The worst business to be in is one which doesn’t have any goodwill, or that goodwill is inherently connected to the individual owner.  Once the owner leaves, the customers or goodwill leaves to.
– Examples of common business assets are:-

  • Plant & Equipment
  • Licenses
  • A customer database
  • A prominent brand
  • Loyal customers who are attracted to your brand
  • A unique marketing system
  • Advertising mechanism
  • A Distribution channel
  • Regular and recurring revenue (ie: management fees, rental, subscriptions)
  • The list goes on and on

8. Utilise leverage to grow and succeed
– Leverage is the ability to achieve more with little or less effort
– A businesses which can be easily leveraged can be grown faster than one which can’t
– Common forms of leverage are:-

  • Leverage money & cash flow
  • Leverage time
  • Leverage skills & resources
  • Leverage marketing
  • Leverage a system

9. Can EASILY obtain bank funding
– One of the biggest forms of leverage a business owner needs is the leverage of money
– The most common way to leverage money is through bank finance
– Banks will not readily lend against a businesses goodwill (especially not in todays economic crisis!)
– There are a few good businesses which banks do still lend against

How does your business or the business you are considering to purchase stack up against these 9 Ideal Features?

Call us today if you would like further discussions or explanations on the above Ideal Features.

The LPO Advisor