What You Should Look for When Examining a Business
NON-FINANCIAL CONSIDERATIONS - All of your focus shouldn't be on the books and records of the company. Financial statements do not tell the entire story. There are historic documents. You are not buying the past profits, but rather you are buying the right to future profits. A few of these non-financial considerations are:
New and Pending Legislation - Try and research any possibilities of forthcoming legislation that might have a future impact on this business. Laws and legislation can and do ruin businesses and propel others.
Social and Lifestyle Changes - Lifestyles, concerns and attitudes are changing everyday. Detecting social trends can lead to substantial profits. By the same token, failing to recognize a social trend can prove fatal. Some examples like cigarettes, disposable diapers and auto emissions are just a few items that concern us today. The mom and pot grocery stores are long gone. Video stores were hot, now there not. The cable T.V. business and mobile communication are business that have boomed and which have a bright future. Be aware of changes.
Research The Industry and Your Competition - In our free market system, competition is a fact of life. Check out your competition before you buy. Check product lines, pricing and, if possible, observe the operations. Is your prospect any better or worse? Is a new competitor coming to town? Ask around. Check the township or county for any new business filings. If so, is there enough room for two of you? Spend some research time investigating your industry. How is your target business doing in comparison to other companies in the industry? Trade and professional associations can help you find this information along with the U.S. Department of Labor Statistics. Many business brokers have comparable company and industry information you can use as a gauge. Stock brokerage firms are also an excellent source. Robert Morris and Associates of Philadelphia, Pa. is one of the best-known information sources in the country and can provide ratios and statistics for just about any industry. Accounting firms and bankers frequently use this source. Our beloved Internal Revenue Service provides statistics of partnerships, proprietorships and corporations that can be obtained from the Superintendent of Documents, Washington D.C. Your local Chamber of Commerce is another good source.
Facilities - Be careful about a business that has equipment that could become or is inefficient by today's standards. If a competitor has superior equipment, you may find yourself at a disadvantage. If you have to upgrade, can you afford to? Maybe you can't afford not to. You may have to plow additional capital into the business sooner than you think.
Economy & Industry Projections - There are certain industries that become extremely sensitive to economic conditions and interest rates. The home building, retail and automobile industries tend to flatten in sluggish economic times. Conversely, used car dealers, auto parts stores, auto repair shops, home improvement centers and shoe repair shops tend to remain steady or slightly increase during slow economic times. How does your business size up?