Gary Benson suggests looking for three potential red flags in the financials: evidence that the seller has inflated sales (perhaps by selling off assets) or reduced costs (perhaps by layoffs) to improve apparent profit just before the sale; unlikely financial ratios (i.e., income as a percentage of sales; check industry averages); and trends that don't make sense (inconsistencies during the past three to five years).
Reading the fine print: Get the little facts as well as the big ones. Kjelgaard simply failed to read his lease carefully, discovering too late that it was a significant burden on the business.
Hiring the right people: Kjelgaard chose his brother in law to run the laundry initially, because the fellow was in a pinch and needed the job. This is never a good reason to hire anyone, especially a relative. Hire someone because they'll do a good job, not because you want to help them out. A new business simply can't afford that kind of charity.
Resisting wild impulses: Kjelgaard developed a pattern of rash behavior that only reaped more trouble onto his pile of woes. He bought the laundry almost on a whim. Then he quit his regular job in frustration at a most inappropriate time just before he would have earned significant new stock options. He raised dry cleaning prices dramatically, without realizing it would stifle business entirely. Key moves affecting your basic business plan should be made slowly and carefully, with full consideration to possible negative outcomes. In buying and running a business, patience is as important as ambition.
Keeping your balance: Kjelgaard bought the laundry to ward the end of a massive project at Microsoft development of Windows NT during which he worked long days and weekends at his regular job before he could even think about the laundry. Kjelgaard's family came last, which caused a terrific strain at home on top of the business challenges that soon developed. By taking on a much too ambitious role, he began to fail everywhere, which nearly cost him his marriage as well as his business. It's paramount to budget time for your family when you engage in business activities that extend be yond normal work hours.
Final Question: Must You Buy?
Buying a business has at least one major, built in problem that other forms of self employment do not: Incurring significant debt. Unless you're extraordinarily cash rich, you'll likely be taking on the biggest financial burden of your life. If the business is really worth it, and you're truly committed to seeing the whole thing through, then go for it. But if you have even a single serious doubt about whether this is a good deal and whether you'll want to stay with it until that debt is paid off, wait. Consider whether there's any other way you could get into this kind of a business without buying one.
Just before I resigned to go into business for myself, I proposed buying the newsletter division of the publishing company where I worked. The newsletters were nicely profitable; I was entirely capable of publishing them; I was motivated to do so; and I was well known to our customers. All indications were that this was a solid opportunity for me.
However and perhaps to my everlasting benefit the owners refused to sell the newsletters to me (they didn't want to divide the business in that way). Only then did I realize that my reputation and abilities were sufficient for starting my own business without incurring any significant debt. What a revelation this was!
Suddenly, I understood that since I wasn't taking on an obligation to pay off hundreds of thousands of dollars to a previous owner, I had all the freedom in the world to pursue my own work. All I had to do was cover my family's income needs. There would be no sweating over the books to see if we'd be making enough this month to meet all our obligations no five or 10 years of waiting until I was truly the owner of my own business.
On my own, I remain free to borrow and buy if I see the right opportunity, but I'm not tied to it. It's a great feeling.
Before you burden yourself with a big long term payout to a previous owner, consider whether there's a way to make your dream work without buying a business. You may be pleasantly surprised.
