number seven in a series taken from: How to Evaluate and Profit from a Business Opportunity - The Entrepreneur's Guide When you start looking at an opportunity you will begin accumulating information about the business. Some of the information may be provided by the seller, some by the seller's agent if there is one, some from the industry's association, some from other research you do, some from competitors and customers, and some from employees. Besides the hard facts; sales, costs, profits, market coverage, etc., you need to look for differences in the facts -- red flags, warnings that will prompt you to look further at specific points. What you want to see is confirmation of the situation. For example if everything presented shows the business as being in great shape, but the suppliers tell you that they don't get paid on time and when they call they always wind up talking to somebody new who makes promises that aren't kept -- you have a red flag. Information like that is not necessarily a reason to stop looking at the opportunity; it's an opening to talk very seriously to the seller about a specific item. How the seller reacts is critical. He or she may "fess up" and tell you what's really going on. This may lead to the start of a serious negotiation on the price and terms. While you are engaged in this process, you can start thinking about how you fix the problem or problems. If they star to dance around the issue or profess ignorance -- you have another red flag. Many times a seller may prohibit you from talking with employees, or the suppliers or the customers -- and often times there is a valid reason for this constraint. Don't give up; find out what it will take to remove the prohibition. Maybe you have to pose as a new insurance agent, or a brother-in-law from back east. The key is, find out what you want to know. Before I met my partner of many years, he bought a large warehouse in Las Vegas. He was a very smart businessman, but he too got fooled. As part of his due diligence he asked for the rent roll. After he closed the transaction and began to receive the rent checks, he found that he was short a significant amount of income. He went to the warehouse to talk to the tenants and to his dismay found out that those who had not paid were not his tenants -- they were occupying another warehouse the seller owned. The seller had given him the rent rolls for both warehouses in order to justify the price he was asking for the one. This was obviously done with intent to defraud and misrepresent and my partner could have sued for damages. He probably could have won, but he had long ago come to understand that the only participants in a lawsuit who win are the lawyers. Instead he and the seller worked out a deal which in effect adjusted the sale price. The seller didn't get as much as he wanted but probably got more than he would have if the transaction would have been based on the true rent roll and the buyer didn't pay as much as he did, but probably more than he would have based on the true rent roll. As you review the information you are provided and find on your own, ask questions. See how the seller responds to questions about why sales fell in a particular quarter or why expenses spiked one month. In addition to learning some facts, you may also learn how well or poorly the business has been run. If it has been run well, it may be difficult for you to make big improvements. If that is the case then you should make a decision to buy based on the return on investment that has been shown -- so don't pay a penny more than you want. If the business has been poorly run and you can see how to make it better, then you might want to pay a little more -- because you will be improving the ROI. In any event thoroughly check the information and then check it again. Don't buy a non-existent rent roll. You will find more about this topic in chapter sixteen in my book. By Art Consoli www.artconsoli.com |
