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What do I need to know when I am buying a Business?

Guest post by: Stan Prokop

Article Overview: The articles provide insights as to some of the values that legendary investor Warren Buffett places on purchasing a busines

What do I need to know when I am buying a Business?

I often wonder if business owners who are looking at purchasing a business take the same sort of outlook as when they are buying something in the stock market.

Let's take some thoughts from the way Warrant Buffet looks at a company and determine if we could be using those same successful strategies.

Those strategies tend to be summed up in a very concise manner -> make sure you understand what you are buying, ensure the industry prospects are favorable, and if management is going to stay on in some capacity make sure they know what they are doing !

Many owners I meet look to buy into businesses, or franchises for that matter, in an industry they don't understand. We would say that if you can't positively feel good about knowing the real sales potential, how expenses occur, what is the cash flow cycle of the business then you should not by look to purchase that business. Naturally many business owners will often get a strong sense of missing a major opportunity - the business owners forgets that Buffett once said ' above average results ... are often produced by doing ordinary things '.

Many business owners like to focus on buying a turn around business, a business that has been either abandoned or poorly managed by its previous owners. While there are clearly some great turn around stories out there, more often than not these transactions become large challenges and financial nightmares. More simply speaking: The business was cheap to buy for a reason!

In a perfect world, (and we realize it's not!) it is optimal to consider purchasing a business that has a solid product and reputation.

The people aspect of purchasing any business is also important, and great investors such as Buffet place a large emphasis on management. Obviously the business purchaser has the focus of either keeping management or replacing management. Naturally management that has a focus on the bottom line and on long term growth are to be very valued.

At a certain point it gets down to 'price ' . Business acquirers should focus as much on return on equity as just net income. That is one the key areas in a Buffett type purchase decision. A huge mistake is to also focus on volume as opposed to profit margins. Most business acquisitions involve the buyer assuming or generating debt. The overall focus, it goes without saying is to minimize debt.

Getting back to our legendary investor, Buffett creates a formula for what he calls owner earnings - which formula is as follows:

Net profit + deprecation - Capital assets needed to be acquired

We would agree that this is a great way to look at profit potential in any business being acquired.

Buffett modeled his career on one book, a famous finance book entitled 'The Intelligent Investor ', by a fellow named Ben Graham. As dry and out of date this huge text might seem to today's business person, we could still all use a little ' intelligent investing' assistance when make a major decision to buy a business .

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Article Tags: Buying a business, Warren Buffett



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My entry - 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read - this is a fascinating book about the history of Business theory, and I'd recommend it to anybody. 2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto. 3. PADI: The Business of Diving Book Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.
Re: Is it worth buying a Dell computer with financing? - what you should know is that whenever you are buying any item and apying monthly you are definitely paying at least 50% more than if you buy it cash. I beleive on the long run it is worth buying the computer with finance if you are using it for business. My rules about buying things on credit is basically for business and nothing else.
Re: Buying Text Links - Can You Do It? - Hi, Google will not ignore the fact that you are buying/selling links. If they find out your website or network is heavily involved in buying links they can lower your PR and rankings organically. I guess the point I was trying to make (1) they do not say you technically can't (2) there are ways on buying links/sponsors/advertising legitimately around being noticed. What do others think? Jeff
Sure its right - I guess it depends on how insecure the guy is. MOST men love to be the one doing the buying when you go out. When you're married it changes things as you start buying houses, having kids, etc. J
Re: What would you do with $500,000 or less? - You buy traffic to you websites in many ways. PPC is one of them, buying impressions and media buying are others. and advertising on people blogs and forum are others.


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