Risk vs. Reward

The risks of buying a business are great.  That’s one reason that our Broker Service Acknowledgment form that potential buyers have to fill out clearly states that there is risk associated with buying a business.  The question that buyers need to ask themselves is whether the reward is worth it?  Only the buyer will know the answer to that.

Do I have the business aptitude to successfully continue to run the operation?  Do I have management experience?  Do I have industry knowledge?  If not, what can I do to ensure that I continue to run this business successfully?  These are just a few of the questions with regards to skills that a buyer needs to be thinking about as they are determining if the risk is worth the reward.

Other questions buyers need to think about involve finances.  Does this business produce enough cash flow for me to support my family in the manner that they’re accustomed?  Do I have sufficient funds for a down payment if I need bank financing?  How is my credit?  It’s not just the bank that is going to be interested in your financials, but also the sellers if they have to carry a note.

I’ve been teaching a Junior Achievement class for the last several weeks and we’re discussing entrepreneurs.  Last week’s topic was about analyzing risks and rewards in a business.  Those decisions don’t stop once you’ve made the decision to buy.  In fact, now you will be facing these decisions on a daily basis.  What happens if you’re supplier’s truck breaks down and can’t get you your materials in time?  Do you try to find a supplier that’s closer that has the material?  Do you call your customers and tell them you’re going to be late delivering?  Do you offer a discount for the late delivery?  These are all decisions you may have to make.  What are the consequences of those decisions and do you have the stomach to be making them every day?

Your livelihood is dependent on the decisions that you make.  Some of them will work out well for you, but others won’t.  All you can do is learn from those experiences.

And to be honest, it’s okay if you don’t have the stomach for it, but that means that you probably shouldn’t be buying a business.    As my father use to say to me, “you can lie to me, but don’t lie to yourself.”  If there is ever a time to be honest with yourself, this is it.