Why 'how much' should not be your first question (or second, or third)
Whether we’re assisting a client to buy a business, providing advice or due diligence, or fielding enquiries on businesses we’re marketing for sale, one of the first things I tell people is the price of the business should not be their primary concern.
Now that sounds a bit strange, I know, because price is obviously important – it would be silly to enquire about a business worth $5 million, for example, when you have $500,000 maximum to invest.
But, and I’m very serious about this, set the price of the business aside in your initial discussions and investigations because the first questions you should consider are:
- What do I want from the business venture? Will this business allow me to achieve that?
- Do I feel there is a close alignment between my core skills, experience and expertise and the business I’m looking to buy? What is that alignment – what are those skills?
- Do I feel passionate about working in, owning and managing this business and confident in my ability to do so?
Take the acid test
Those are the acid test questions you should ask whether you’re moving from an employed environment and buying or starting your first business, whether you’re looking at a second business to add to a portfolio, or adding a business line to an existing operation.
The reason we ask these questions is that buying a business is an investment class that is not as liquid as many others.
Buying a business is an investment that usually has a longer term cycle – it’s not a straight-forward, simple investment in a blue chip company on the stock exchange.
Have passion for the opportunity
Your answer to the ‘passion’ question is just as important whether you are seeking to work in the business day to day, or planning to act as an investor with oversight.
You have to be comfortable and confident with the fabric of the enterprise you’re looking to invest in and take a risk in.
Ignore these acid test questions at your peril
These are very ‘soft’ concepts and not ones you’ll necessarily get from a purely finance or numbers-based assessment, but all too many times I’ve seen people go into opportunities where they didn’t have positive answers to those acid test questions.
Usually, one of two things happen:
- Six to 12 months down the track they have an ‘oh no’ moment and think ‘why am I here’, ‘why am I doing this’, ‘this is not what I expected’, ‘I don’t feel comfortable with this’; or
- They move into the business and suddenly it doesn’t perform as it did for the last owner, and then they’re starting from behind.
So, first up, you must have passion for the business opportunity you’re considering and you must have an alignment of skills and capability. Everything else should flow from that.
If you can’t answer a full and wholehearted ‘yes, yes, yes’ to those questions, you should seriously question why you’re spending your time assessing this opportunity.
