What Do I Need to Know When I Am Buying a Business?

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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.

Stan Prokop is the founder of 7 Park Avenue Financial. See http://www.7parkavenuefinancial.com The company originates business financing for Canadian companies and is a specialist in working capital and asset based financing of all types. For more information or contact details please see: http://www.7parkavenuefinancial.com/Home_page.html

7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Office = 905 829 2653

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com


Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations .

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.

Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.

Stan Prokop





















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