Which businesses are worth buying? I have noticed specific industries have a higher portion of the number of businesses for sale throughout many years. To name a few, kitchen cabinet manufacturing, granite shop, mechanic shop, restaurants seem to be frequently available for purchase. It is beyond the scope of this article to discuss the reason why these industries have high turnover. I am not suggesting such sectors are not worth buying, but you should consider more scrutiny and caution with books and numbers, customer base, and the reason for sale.
Which numbers to pay close attention to? The bottom line for a company is gross margin and profit. A company’s sales and revenue can be healthy; however, it rarely says anything about the gross margin. In the long run, low gross margin, high expenses will bring the company to the brink of bankruptcy. The gross margin varies depending on the business, but you should aim for a gross margin of 20 percent or higher, to put it simply.
I cannot emphasize the importance of looking at company numbers before even considering the company - as the saying goes, “numbers do not lie.” I suggest asking for 3 to 5 years of company books. You will be surprised to see how many businesses do not have adequate books, for whatever the reasons. Having an experienced broker and accountant will be a great asset to provide you with the numbers to focus on.
Long-term success. The short-term and long-term success of any business depends on keeping a healthy gross margin and lowering the feasible expenses. Businesses that are operating in the industry niche have a unique advantage over the competition. Such an advantage means they do not have to compete on a price level to get customers; hence, they can take home a more significant profit. Advantages can be brand name goods, high-quality items, luxury items, strategic location, and even a strong sales team. As a buyer, you have to recognize the niche if there is one. A savvy buyer and broker will investigate the possibility of a niche for the business possibly missed by the seller.
How to identify a business with a good reputation? It takes a lot of effort and time to build a good name for a company. I am not talking about the product or the service offered, but overall behaviour and attitude. You should talk to some customers, staff, or even competition. Companies policies and action in the marketplace, marketing can leave lasting adverse effects. If I asked you to name a few companies that treat their employees and customers, and everyone else with courtesy and respect, I am sure you have a few in mind. You do not want to be stuck with a company that is known for its misbehaviour.
Buying an existing business: How to identify the future potential for the business? PART 3
The above Real Estate article was provided by David Khosravi, a leader in his field in North York, Willowdale Real Estate, Reach out to David via email: firstname.lastname@example.org or by phone: 416.990.2424