Look beyond the purchase price and financial track record when you are buying a business. Steve outlines five primary marketing questions to ask when buying a business so that you have a full understanding of the company’s market and its value proposition to its customers. Marketing considerations such as these will impact your long term success, and subsequently your buying decision. Be sure to talk to your current business advisors for more information on how these questions to ask when buying a business might impact your particular situation, or talk with Steve via email or phone to get his advice.
Here is part two of things that you need to think about or look at when you’re evaluating a business to purchase. And in this segment, we’re taking a look at more marketing issues.
And the first one, of course, is value proposition: what makes the product or service of the business you’re looking at to be so good that you’re going to be attracting customers away from their competitor. Everybody has competitors. And so when you take over that business, don’t just buy the business because it seems to have a good financial track record, but understand truly what the value proposition is. Why do people buy from this particular business?
You may be able to change that value proposition a little bit as you go forward to make your business grow faster and be even more profitable. But if you don’t understand what that value proposition is, and you start… and you take over that business, you run a big risk of not continuing to communicate that, or even harming the value proposition of the business, driving the business down right after you’ve purchased it, which obviously isn’t a good answer.
So understand the value proposition. What makes that business unique?
And think about the number of customers. Some businesses have a very small number of customers. These are specialized businesses that might have five or ten customers that are really key and drive 80% or more of the revenue of that business. If that’s the case, you need to think about how you’re going to make those five or ten customers really comfortable with the transition to you. Because if they have a small number of customers, and you come in, and one or two of those customers decide they don’t like you, the personality doesn’t fit, they don’t like the direction that you’re going, and they leave, that can be a huge hit to your business, to lose that much in sales.
It’s usually safer, in the continuity of buying a business, when there’s a large number of customers, as opposed to a very small number. But each case is different, and you have to look at it. But think about how big is that customer base in numbers.
And then what about the competition? It’s kind of related to value proposition. But who is the competition? And if you’re not sure, you need to sit down with the current business owner and walk through with them where their competition is coming from, so that you can think about how can you effectively compete against these people? Because they’re the ones who are trying to put you out of business, instead of you putting them out of business, because you do such a wonderful job of meeting customer expectations that everybody wants to deal with you. Hopefully.
And think about market share. It’s always good to understand what part of the market that you have. Whether this company you’re buying has 25% of the market, or 2% of the market. There’s nothing magic about that. But understanding your share of the market is critically important, because if this is a particular company that has a real neat niche, and you already have 80% of the market, there’s not a lot of growth in market share that’s going to come there. But if you’re a 1% or 2% player, you know, eventually you have the opportunity to grow.
And part of that, again, is related to competition. If your competition is really well-funded, an organization that has a nice financial structure, they have the ability to play hardball with you in that competition, that’s going to be more difficult to deal with. The ideal situation is when your competition’s a little bit disorganized. Not efficient or effective in what they do. And the market is poorly served.
Now, when you come along, even if you’re buying a company that has 5% of the market share, and you can come in and make their experience so much better, meet their expectations in a way that they’ve never been met before, you can take that disorderly marketplace that’s out there and really bring something to the table that makes people flock to you, rather than dealing with that bunch of disorganized competitors. And that can be a wonderful opportunity, and we look for that sometimes as entrepreneurs, as a way to turn around a business, really make it profitable, and then be able to sell it for quite a profit down the road.
Then think about industry trends. Where is the industry going? Is this industry being subjected to more regulation and more government restrictions? Think about whether the industry as a whole is growing, or whether it’s sinking. Because one analogy is that that industry as a whole is like the ocean, and if that industry as a whole is growing, then all of the boats on the ocean are floating up with it. And if the industry as a whole is sinking, then all of those boats are sinking.
You don’t want your boat to be sinking. So if you’re getting involved in a business where the industry is on the decline, that’s many times a clue to not get involved with that particular business. I like to be in industries that are growing, or at least stable, with an opportunity for you to grow and take more market share in it.
These are just some thoughts. I’d encourage you to go back to my website and find the article that deals with this. It goes into more detail on more issues. But I just wanted to give you a heads up so that you can look at some additional thoughts that you should have as you evaluate the next business that you might buy.