By: Kris Fuehr, Paulson Exchange
When you evaluate a business to buy, you don’t have to know everything about it at once. Richard Branson once said he mainly focuses on three measurements to monitor his business:
Butts in seats – or whatever your equivalent for “sales/consumption of capacity”
Customer loyalty and satisfaction
Everything else will just be details that can be ironed out.
As Steven Covey famously said, “The Big Rocks are your most important, so put them first. That way, you make the less important things (gravel) fight their way in.”
Apply this concept to your business evaluation. Your FIRST step is to understand DEAL-BREAKERS. What could KILL your business? What isn’t SUSTAINABLE? Then, determine the details of the expenses to ensure that overruns can be identified.
Below are some examples of LESS effective ways of evaluating a business. This comes from an exchange I had with one prospective buyer after I sent him the P&L for a business. Can you distinguish the big rocks from the pebbles?
“Thanks for the info. I have a few questions: How many estimators in the business? Do they also function as Project Managers? What is the role of the owner in the business? Was the large expense of entertainment the Christmas party? Costs of sales are high. Is there other ways to decrease this? Would they have a current Work in Progress report? What makes up the balance of the office staff? Do they have a breakdown of business by revenue – eg. government contracts vs industrial vs retail/commercial? “
There are some important questions in here, but the Christmas party probably wasn’t a huge priority in this early stage of evaluation.
One effect the All-at-Once approach has is that it discourages you from nearly every business you look at and the whole transaction becomes intimidating or you may walk away from a great opportunity.
Keep a realistic view of what’s important and what’s just sand and pebbles so you keep your eye on what really is going to lead to success or failure in your business.