What You Don't Know Can Kill You
HOW TO EVALUATE THE TRUE WORTH OF A BUSINESS
PART 15 of 21
"What You Don't Know Can Kill You"
By: Â Willard Michlin
An expert's comments on the pitfalls of buying a business and how to find them.
When you are considering the purchase of a business, the normal action is to study the financial history of the company.Â This would include looking at the profit and loss statements as well as the balance sheet.Â You would look for history trends to see if they are going up, going down, leveling off or going up and down like a roller coaster ride.
Business buyers believe that the past is a good representation of what the future will look like. This may or may not be true. When you change management drastic things can happen and do happen; some times for the better, sometimes for the worse.Â The big unknown for the new management is that they do not know how the old management actually operated the company and what the successful actions were and which actions will bring about total failures.
In truth, even the old management doesn't know what it was doing right or wrong.Â If they did, the business would probably have been sold or be up for sale.Â Successful businesses are rarely sold, even when the owner is into retirement age.Â He usually continues to work until he finds he can no longer easily correct the problems.Â Then in frustration, he wants to retire and avoid those hard decisions.
When the seller turns the company over to a new buyer, he almost never tells the buyer what really difficult problems he was having, and is now dropping them into the new management's lap.Â If the new owner doesn't figure out what those problems are quickly and doesn't solve them quickly, the business is done for.
All profit making businesses have 21 distinct functions that must be done to keep businesses functioning.Â When any one of these functions is not known, the company becomes weaker, poorer or less successful, to some degree. When a new management team takes over, it could be a year or longer before all of these functions are discovered or known about fully.
When sellers turn over the management of a company to new owners, they usually only turn over maybe half of the functions and forget the other half. This leaves the new management to discover, over time, what was not turned-over.Â By the time the new management learns about one of these black holes, the company, is broke or lost its biggest accounts or found itself in a lawsuit.
We have developed a questionnaire that asks about each and every one of the twenty one departments or functions of the organization.Â At the conclusion of the three hour interview, it becomes easily apparent as to...
1. Which departments are not being properly handled,
2. which departments are being handled correctly
3. which departments the seller has been trying to handle but has failed miserably and is the real reason the business is being sold.
With this knowledge, the new management team can quickly address the major areas of trouble and slowly address the secondary trouble areas. This questionnaire is also appropriate, at any time that the management feels there is some problem or difficulty that is not correcting.
Willard Michlin is a Due Diligence and Business Evaluation Advisor.Â He is also a California Business Broker and a California Real Estate Broker. He has published many articles and is in demand as a public speaker in the Southern California business community.