Buying a business in an industry you don't know can be a daunting task. In this five-part series, we discuss how to buy businesses and industries that you don't know about safely. In this article, we focus on finding businesses that already have Management in place.
Assessing Deals with Management in Place
When assessing a business, it is important to look at four key quadrants:
- sales & marketing,
- production & operations, and
- people & leadership.
If any of these quadrants are below maintenance-level, it puts the business into a different category.
Maintenance level means that there are still potential problems, but they are manageable.
When looking for a business, it is important to find one that has all four quadrants at maintenance level. This will make it easier to grow the business exponentially.
Additionally, it is important to find a business that is big enough to be profitable. Many small businesses are sold on a multiple of Seller's Discretionary Earnings and, as a result, when factoring in loan payments and a small salary for yourself, many deals don't allow for any flexibility in adding to your team, testing new marketing ideas, or making mistakes.
Finally, it is important to assess how much input is required by the seller to maintain any one of the quadrants. You can help uncover this information by asking sellers questions such as:
- "How often do you meet with or assist the salespeople?"
- "How do you train employees?"
- "What's your philosophy on management?"
Buying a business in an industry you don't know can be a daunting task. However, by assessing deals with Management in place, you can get into an industry that you don't understand completely and do it with relative safety. Asking the right questions to identify gaps in management can help uncover the major gaps that can put you at risk before you buy the business.