How can you tell if the business you’re considering buying is a solid business? Will it be a worthwhile investment?

A profitable business will have the following:

• High margins: 60% of Gross Profit.
• Sizeable assets: Inventory, property, stock. For example, the company I bought for £1 had 80 unused Apple Macs, which we were able to sell off as a job lot for £40,000.
• Recurring revenues: You need to know there is sufficient revenue to cover:
• Your £10,000 monthly management fee—or more if the company can afford it.
• Finance repayments.
• Any deferred payments to seller.
• Sufficient funds to cover operating expenditure (OpEx) and capital expenditure (CapEx). Make sure the business has sufficient funds to cover its operating expenses (for example, salaries, rent, insurance, property tax, R&D, pension plan contributions and business travel). It should also have sufficient funds to cover necessary capital expenditure (such as hardware or vehicles).
• Long-standing contracts.
• Substantial IP. These could include trade secrets, copyrights, patented and unpatented products or technology or processes, use rights, licences and so on.
• A history of steady sales. Beware of fast growth in sales because this might require a substantial capital injection to finance growth.
• Automated marketing.
• High performing marketing controls—these will help you attract and convert a steady stream of leads for the business and include:
• Sales letters;
• Email sequences;
• Web pages; and
• Collateral.
• Streamlined and systemised processes.
• Loyal, trained and qualified staff.
• A ‘Can Do’ culture.