Don’t Go into Business Wearing Rose Tinted Spectacles

Don’t Go into Business Wearing Rose Tinted Spectacles

SHARE

It must be emphasised, right at the outset, that buying a business can be extremely stressful. Moving from being an employee to an employer is a big void, and becoming the boss scares many employees from taking this route. You are now in control of the business, so you must accept the risks and liabilities of the business. If you get it right (which can take up to six months) you will reap the rewards, but if you get it wrong you can end up with major problems (and end up going belly-up).

Unfortunately, at the present time the failure rate of small businesses is high (some say 70% go bust in the first two years). The good news, however, is that although many successful business owners failed in their first endeavours into business, they learnt from this experience and on the second or third time around achieved their objectives and rewards. Finally, thinking you are the boss, without acknowledging that the bank manager and clients/customers control your destiny, is the pathway to disaster.

Well-known financier Warren Buffet has stressed that going into business is akin to marriage, and his words of wisdom are “Don’t rush into marriage, take your time.”

Buy right

Bearing this point in mind, the following factors must be considered when starting, buying and owning your own business. Bear in mind that many of these points form the basis of business failure if they are ignored.

  • When in doubt, walk away. If you don’t understand the industry you are entering, don’t do it. You must understand the product/service of the business as well as the legal entity being used for the business.
  • Watch the jargon and legalese used in legal documents – if you don’t understand, get clarification. Don’t sign documents when you do not understand the terms – let the signer beware.
  • The essential requirements necessary for success centre around (but are not limited to) having at least: adequate capital, necessary business knowledge, sufficient resources and sound management skills.
  • Be honest with yourself. Take the time to asses yourself, your business idea, capital, market and competition. Ensure that you have the right mental approach, aptitude and money to start your own business.
  • Paying too much for the business, by not getting advice on how to value a small business. What is a business worth? What a buyer is prepared to pay for it and the seller is prepared to accept.
  • Let the buyer beware. Understand that the seller will tell you the truth, the whole truth and anything but truth. He will dress up the business to hide vital flaws. Do your homework and check out the business carefully, with the help of professional advisers, if necessary.
  • Do your due diligence. You must do your homework to understand what you are really buying. A seller will state that he has the best business in town, so – why sell the goose which lays the golden egg? Dig deep. Know what you are paying for.
  • Always recognise that: cash is king, information is power, profit is sanity, turnover is vanity and the spoken word is cheap. The lesson? Get everything agreed put into writing and signed by both parties as soon as possible. Notes from meetings can be extremely valuable if a dispute arises.
  • Ascertaining when you enter business who the competition is, and how long they have they been in existence. Preferably look for a niche market, but often there are many businesses in competition to you.
  • Knowledge of security and putting in place the necessary preventions is a necessity. There have been substantial increases in crime in small businesses in recent times. You have a legal obligation to protect your staff, family and yourself.
  • It is a reality that many owners of small businesses are guilty of some form of crime, such as tax/VAT evasion, using the business credit card for personal use, over charging for fees etc. Is it worth it? Sleep easier at night, be honest.
  • Fine tune your negotiation skills. You can make or lose a lot of money depending on your negotiation skills, so negotiate everything! Let the seller put his price on the table first, and then negotiate. If you are not prepared to negotiate, you could get bulldozed into matters you had no intention of conceding.
  • From a financial perspective it is necessary to –

ü  Know how to earn money, to cost products, to prepare budgets, to control spending, to manage income, expenses and profit.

ü  Keep to the business plan, understanding the difference between income and cash flow, picking up warning signals from cash flow and having adequate insurance. In simple terms, more must come in than goes out.

  • If profits/dividends don’t cover loan repayments, you are in trouble!
  • Don’t be shy to ask for advice. Even highly successful business owners have mentors.

There is no doubt that the rewards for running a business can be great, and far better than achieved as an employee. However, you must really know the risks you are taking. An important reward is that if you prudently build up a business, its value will grow and eventually you will be able to sell at a good price, and with more experience you can move into a bigger business. Alternatively, you will be better geared to expand your existing business.

You may think you are the boss, but as stated, so does the bank manager and your clients and customers. Who is right? Without clients you have no business.

Bob Power
Bob Power is the owner of Power Corporate Consultants and an expert on buying and selling a business, amongst other things. He is also the author of Let the Signer Beware and How To Buy a Small Business.