By Jim Schleckser
While it might seem like a dream come true--to finally own your own business--there's also some considerable risk you'll need to evaluate before you go ahead on a transaction.
I've identified a few critical high-level questions any prospective entrepreneur should ask before taking the plunge to buy a business of their own.
1. Does the business have recurring revenue?
One of the riskiest aspects of any business is the stability of the revenue. That's why one of the first questions you need to ask a seller is how their company earns its revenue. Knowing if the business you want to buy has predictable, recurring revenue streams in place is critically important. That might include long-term contracts or a customer base that pays a fixed amount every month. Having these kinds of recurring revenue streams not only makes the business less risky, but it also becomes more valuable if you ever want to sell it yourself. On the other hand, if the business requires you to go out and make a new sale every day, you will be taking on a great deal of risk.
Side note: This is the reason we switched the membership program to auto renew. This is a key step in knowing you have monthly revenue coming through your door.
2. What are the relationships with customers?
Ask a seller what the status of their customers is. Are they happy and likely to continue buying from you? Or, are things messier, where some customers might be at risk of leaving? The other key question to ask is about sales concentration. Does the business have 20 to 30 customers representing no more than 10% of company revenue? Or does it have 3 or 4 customers, two of which account for 90% of revenues? The more distributed and secure the customer base is, the better. Otherwise, the business becomes riskier.
3. What's the nature of competition in the business?
No business operates in a vacuum. So, it's essential to understand what kind of competitive pressures it's been facing. One area to look closely at is gross margin--the business's revenue minus the cost to deliver service. Is gross margin is growing over time, which means the company has found ways to keep costs under control while raising prices? Or, is gross margin eroding, which might indicate rising costs and pressure from competitors and customers to squeeze prices? This could also result if the business is being pressed on price by its biggest customers. Any company that erodes gross profit should be a big red flag. As the old saying goes, nobody wants to catch a falling knife.
Комментарии