Thinking of buying a business with your ‘nest egg’? ... Some sobering advice and tips

Most of us know, or know of, someone who has retired with a nice little ‘nest egg’, or they’ve received a ‘golden handshake’ ... and then gone out and bought a business with it. And lost the lot. And the statistics don’t give much comfort either. It’s been estimated that up to 80% of businesses FAIL in the first five years. And 80% of the ‘survivors’ fail in the second five years! Pretty daunting statistics.

Now of course, this is not to put anyone off the idea of getting into business. There are countless success stories of former employees throwing it all in and launching a new venture, and making a go of it. Michael Gerber, author of “The E-Myth ... the entrepreneurial myth” (an excellent book by the way for anyone considering going into business) called it having an ‘entrepreneurial seizure’. Whether you’re going to succeed or not is primarily a result of good planning, doing your due diligence, and taking your time to validate your idea. OK, and a bit of good timing and good luck.

Age is no barrier to going into business as long as you have your health and energy. Ray Kroc was 54 when he started his business! He had a job selling milkshake mixers when he noticed an unusually large order come in from a tiny restaurant in San Bernadino in California. So he took a trip out west to see what they were doing. On discovering what the MacDonald brothers were doing, he bought them out and launched the McDonalds franchise business. It now serves 47 million people a DAY from some 31,000 stores worldwide. Now, you may not want to be the next Ray Kroc, but it’s a pretty inspiring story for ‘grey hair’ budding entrepreneurs, don’t you think?

Sadly, there’s not a great deal of help for those wishing to BUY a business for sale. Accountants don’t have the expertise to fully assess a business in most cases. The broker of a business is unlikely to talk you out of a business that isn’t suited to you, or one that is a bit of a lemon. And the owner surely won’t. It’s not unheard of for some owners to artificially pump up their sales and stock purchases in the months prior to selling, to make the business look more successful than it is. Frankly, there’s a multitude of traps and pitfalls to navigate.

Here are some quick tips:

• Take it very slowly. If you’re told you need to act quickly to secure a great deal, maybe it isn’t one.
• NEVER get emotionally attached to a business you’re about to buy. Instead, discipline yourself to stand back and ask all the hard questions.
• Insist on subjecting the business to scrutiny by your advisers.
• Ask to talk to the suppliers to the business. And to the customers if you can!
• And when it comes to the numbers the business is reputedly doing, cut those numbers back by 15% or 20%. If it STILL looks profitable, then it may just be a goer.
• Make sure you know whether you’re buying a BUSINESS or a job. A business is something that has the potential to continue generating a revenue stream when you’re not there. For example, is a mowing franchise a business or a job you buy?
• Make sure you know your strengths and weaknesses in running a business. Running a business means wearing lots of hats, and being a master at juggling your time and your focus. (Our FREE REPORT - "Mature Age and Want to WORK' - has a terrific 'self-audit' questionnaire inside - so if you haven't requested that report, now would be a good time!)
• Be prepared to set up measuring and tracking of performance. You can waste huge lumps of your financial reserves if you don’t know exactly what is going on in the business. As an indication of what we mean here, let’s say you have four sales people and your sales are $80,000 per month. On average, they’re selling $20,000 each. But in truth, one sales person may be selling a lot less than the others. Often this may go unnoticed, and you’re paying someone who isn’t pulling their weight.
• Forgive us if this seems patronisingly simple, but it happens in all too many businesses. Be VERY aware of your net profit margin on the things you sell. You may have a great turnover on a particular service or product, but you could be making a loss on it, cross subsidised by other services. The ‘80/20 Rule’! 80% of the profits often come from 20% of the activity.

Of course, this list isn’t exhaustive. And there’s lots more about running and promoting a business elsewhere on this site. But if you ARE thinking about buying a business, and this helps focus you on the fact that there is a myriad of pitfalls and processes to go through to protect your ‘nest egg’, then it’s done its part. Happy hunting.

---

Add this page to your favorite Social Bookmarking websites