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.