Five Ways to Grade the Business You Want to Buy

July 1, 2015

grading the business

Buying a business is a serious commitment. As with any sizeable investment, you need to be careful and learn exactly what that investment entails. Overlooking key details is bound to cause expensive problems in the future.

Some aspiring business owners, however, misinterpret this logic and are reluctant to acquire anything that is less than perfect. The harsh truth is that no business is ideal – they all have weaknesses. It’s up to the buyer to find those weaknesses during the discovery stage and decide if they can be managed.

There are five areas that stand above the rest when it comes to inspecting the health of a business.

1. Historical books and records

A business’s record-keeping process can say much about the entity as a whole – especially if it’s a mess. A certified CPA should always be consulted to handle tax issues, so records must be verifiable and detailed enough to cooperate with legal requirements.

Take note of any missing information that could sway your final decision. For example, last year’s sales might be irrelevant if you plan on introducing a new business model, but maybe other unreported figures could potentially make the investment a bad idea.

2. Income

The income generated by a business should be the top concern on any investor’s mind. Don’t get caught in the trap of confusing a hobby with a business. It should be treated as an income stream like any other investment vehicle, regardless of its obvious differences.

The wellbeing of your business will affect your financial future, so you should have a vision of how you’ll grow its income over time. If you see no path to growth, you could end up struggling just to sustain the income it’s already earning, and your money would likely be better placed elsewhere.

3. Recurring revenue

A consistent flow of revenue minimizes risk for business owners. Some industries depend on a few big payouts each period, creating staggering uncertainty. Greater predictability of revenue means fewer headaches for managers. If they’re less nervous about merely making it over the hurdle each quarter, they can devote more time to building upon the business.

4. Age of business

More often than not, a business owner will tell you the earliest days are the toughest. Once a firm is established in the minds of customers, there is less of a need to get the name out. And surviving for numerous years proves that the business has a role in the marketplace.

To an outside buyer, with all else equal, an older business is more desirable to own. A young emerging business is hard enough for its founder to run – imagine taking over before all the kinks are worked out.

5. Employees

Even after devising an ironclad business strategy, its fate rests on the humans in charge of bringing the dream to life. Employee issues are universally experienced and universally dreaded. Problems take many forms and are found in every industry, and the reality is that new owners must recognize the need to cope with them. An incoming buyer needs to account for the current employee situation and reflect on how business will be affected moving forward.

For more insights from Andrew Cagnetta, check out his website.

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About The Author

Andrew Cagnetta is the CEO of Transworld Business Advisors. Andy enjoys helping business owners/buyers realize the American Dream through Business Brokerage and Franchise Consulting/Development. Transworld Business Advisors, LLC is a worldwide franchise leader in business brokerage, franchise consulting and franchise development.

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