{"id":1816,"date":"2019-05-23T14:37:21","date_gmt":"2019-05-23T12:37:21","guid":{"rendered":"https:\/\/www.dazzlepop.net\/site\/?p=1816"},"modified":"2019-05-23T14:37:24","modified_gmt":"2019-05-23T12:37:24","slug":"how-to-evaluate-a-potential-business-acquisition","status":"publish","type":"post","link":"https:\/\/www.dazzlepop.net\/site\/how-to-evaluate-a-potential-business-acquisition\/","title":{"rendered":"How To Evaluate A Potential Business Acquisition"},"content":{"rendered":"
<\/div>\n

As an advisor, I help people buy and sell businesses. I\u2019ve noticed that every potential acquisition entrepreneur eventually asks the question: Is this a good business to buy?<\/p>\n\n\n\n

What they want to hear is that the business they\u2019re considering has no risk and unlimited upside, but as you might imagine, that doesn\u2019t exist. Every business comes with risk, but every business also comes with an opportunity. In this article, I\u2019ll be sharing the nine criteria I\u2019ve developed for evaluating a potential business acquisition.<\/p>\n\n\n\n

1. Growth Opportunity<\/strong><\/p>\n\n\n\n

This is the top priority no matter what your version of entrepreneurship looks like. I believe every business has a growth opportunity \u2014 you just need to decipher what it is and how it would work. When you find that growth opportunity, match it to your skills, abilities, interests and vision of what you want your day-to-day life to look like. Make sure it\u2019s a fit.<\/p>\n\n\n\n

2. Product-Based<\/strong><\/p>\n\n\n\n

Built to Sell<\/em> by John Warrillow is the bible for understanding the benefits of product-based businesses. Service businesses are harder to scale, build value around and sell in the future because the success of the business model is based on the workload of the people, while products build intrinsic value to the company.<\/p>\n\n\n\n

3. Industry Tailwinds<\/strong><\/p>\n\n\n\n

The life cycle of an industry goes like this: startup, adolescence, maturity, decline. In an ideal world, you\u2019re looking for businesses in an adolescent industry because they have innate growth. When you have that kind of industry tailwind, it\u2019s easier to grow your company along with it \u2014 just keep the same percentage of market share.<\/p>\n\n\n\n

4. Real Brand Awareness<\/strong><\/p>\n\n\n\n

Is the business you\u2019re looking at resonant in the market, or just established? Recognize that just because a company has been around for 90 years doesn\u2019t mean it has brand awareness outside its customer base. We assume that because a business has been around for a while, everybody must know about it, but that\u2019s not always the case. It\u2019s true that leadership in the market is a disproportionate competitive advantage, but that attention is earned, not given.<\/p>\n\n\n\n

5. Recurring Revenue<\/strong><\/p>\n\n\n\n

Businesses that have a strong amount of recurring revenue offer you a margin of safety, a strategy popularized by Warren Buffett. If you\u2019re looking at acquiring a company, but its sales are largely transactional, that means you have a cost to acquire each of those customers \u2014 every time. On the other hand, if the company\u2019s revenue is subscription based, you acquire them once and reap ongoing benefits.<\/p>\n\n\n\n

6. Business Risks<\/strong><\/p>\n\n\n\n

Every business comes with risks. Your job as the buyer is to decide whether or not you\u2019re comfortable with those risks. This is a question that nobody can answer for you. Often it\u2019s the entrepreneur and not the business that is the risk in the equation.<\/p>\n\n\n\n

Great tools for evaluating business risk include: Porter\u2019s Five Forces, SWOT Analysis and Clayton Christensen\u2019s \u201cThe Innovator\u2019s Dilemma.\u201d These tried-and-true models can help you quickly understand the economic structure of a business model, industry trends and technological opportunities and threats.<\/p>\n\n\n\n

7. Third-Party Verification<\/strong><\/p>\n\n\n\n

You need a third party to verify every aspect of a company\u2019s financials, starting with tax returns. Look for strong internal reporting so you can be sure of what you\u2019re buying.<\/p>\n\n\n\n

8. Transferability<\/strong><\/p>\n\n\n\n

The first part of transferability is ensuring the business has documented standardized operating procedures. The second part is a little trickier: the seller\u2019s knowledge.<\/p>\n\n\n\n

Specifically, does the seller have specialized knowledge or more general business knowledge? If you\u2019re acquiring a business where the owner is deep in technical work every day, you need to know that upfront. Most buyers are looking to hand the technical work off to other people while they handle managing and leading.<\/p>\n\n\n\n

The last part of transferability is workload. Is the current owner white-knuckling it eighty hours a week, or do they get their work done in twenty hours? If the latter is true, that would leave you more time to work on your business and not in your business.<\/p>\n\n\n\n

9. Old Vs. New Economy Business Models<\/strong><\/p>\n\n\n\n

Think about Amazon. This is a company that is not just driven by new economy metrics like click-through rate and conversion rate. It is also powered by a staple of the old economy business model: a fulfillment network. By fusing these models together, Amazon went from selling books to having a market cap north of $1 trillion. And it isn\u2019t the only one. Apple uses software, but it also engineers its own hardware. Tesla, one of the most innovative companies in the world, makes cars.<\/p>\n\n\n\n

With baby boomers retiring, you have companies built on old economy principles that need to be transferred to the next generation. If you have new economy knowledge and skills, you should be looking for a business where you can merge these two models together and create something that will be strong now and decades into the future. I believe this is the greatest opportunity of our generation.<\/p>\n\n\n\n

Asking The Right Questions<\/strong><\/p>\n\n\n\n

With these nine criteria, you thought you were learning to evaluate what makes a good company. But what I\u2019ve actually been helping you see with greater clarity is this: It\u2019s not about whether a company is a good buy, but whether you\u2019re the right buyer.<\/p>\n\n\n\n

To make that determination, consider why you want to be an entrepreneur, what you\u2019re bringing to the table and what kind of day-to-day experience you want. Those answers will point you toward the right types of businesses, and when you find one with a growth potential that fits your version of entrepreneurship, that\u2019s when you can use these criteria to determine whether you\u2019re the right person to buy it.<\/p>\n\n\n\n

Source: https:\/\/www.forbes.com\/sites\/theyec\/2019\/05\/22\/how-to-evaluate-a-potential-business-acquisition\/#7b2df8f65294<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

As an advisor, I help people buy and sell businesses. I\u2019ve noticed that every potential acquisition entrepreneur eventually asks the question: Is this a good business to buy? What they want to hear is that the business they\u2019re considering has no risk and unlimited upside, but as you might imagine, that doesn\u2019t exist. Every business […]<\/p>\n","protected":false},"author":1,"featured_media":-1,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_vp_format_video_url":"","_vp_image_focal_point":[],"footnotes":""},"categories":[45],"tags":[31],"class_list":["post-1816","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","tag-business"],"yoast_head":"\nDazzlepop | How To Evaluate A Potential Business Acquisition<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.dazzlepop.net\/site\/how-to-evaluate-a-potential-business-acquisition\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Dazzlepop | How To Evaluate A Potential Business Acquisition\" \/>\n<meta property=\"og:description\" content=\"As an advisor, I help people buy and sell businesses. 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