What are the specific things I should consider when buying a business?

[00:00:00] Ralph Estep, Jr.: Have you ever considered buying a business? It sounds exciting, doesn't it? Imagine investing your life savings into a business - only to realize six months later that you've made a terrible decision. But wait. Before you jump in, there are some crucial factors you need to consider. Stick around because today on the show, I'm going to reveal how you can make and more importantly, how you can avoid a nightmare scenario and make a smart objective decision when it comes to buying a business. So today we're going to be diving into the world of business acquisition, and I'm going to share some eye-opening stories that might just save you from making a costly mistake.

[00:00:42] Ralph Estep, Jr.: Now, before we get started, I want to remind you about yesterday's episode, where we explored the four types of student loans. If you missed it, head over to askralph.com to catch up. Trust me, if you or someone you know is dealing with student loans, that episode is something you definitely don't want to miss.

[00:01:00] Ralph Estep, Jr.: Well now, let's get to today's topic. I received a message from John. He's a longtime listener and he writes this,

[00:01:06] Ralph Estep, Jr.: "Hey, Ralph. I've been following your show for months and your advice has been invaluable. I'm considering buying a small manufacturing business in my hometown. It seems like a great opportunity, but I'm worried about letting my emotions cloud my judgment. Ralph, how can I approach this decision objectively? What specific factors should I be looking at? I'd really appreciate your guidance on this."

[00:01:29] Ralph Estep, Jr.: John, I can't thank you enough for your question. It's a crucial one and I'm glad you're thinking about this before making such a significant decision. I'm going to break it down for you and share some real-life examples that I think will really hope to drive the point home. Now, before we get started, I want to remind you that your questions are the heart of the show. If you have those burning financial questions or those questions you want me to bring up on the show, all you got to do is send me an email. You can do that right to ralph@askralph.com or you can visit our website. That's at askralph.com. You're going to see there's a little microphone icon down in the bottom. You click on that, and you just tell me what's on your mind. Remember this, there's no such thing as a silly question when it comes to your financial future.

[00:02:14] Ralph Estep, Jr.: Welcome everybody to the Ask Ralph show where we're mastering our finances from a Christian perspective. As always, I'm Ralph Estep Jr., and I am thrilled you've joined me today. Your trust in the show means the world to me and I'm committed to providing you with the best financial advice deeply rooted in Christian principles. I'm going to ask you for a favor. Listen, if you're enjoying the show, I would love for you to become a part of our community. Go to askralph.com, sign up for our email list and share this episode with someone who might benefit it. And here's a little bonus. When you join our email list, you'll get a free copy of my book, Mastering your finances. Now this book usually sells for $10 on Amazon, but it's my gift to you for being a part of our community.

[00:02:56] Ralph Estep, Jr.: Now, before we get started today, I want to share a Bible verse that I think is particularly relevant. It comes from the book of Proverbs 15:22. And it says this. "Plans fail for lack of counsel, but with many advisers they succeed." This is something you got to keep in mind as we discuss the importance of seeking objective advice when making such big financial decisions and certainly buying a business is one of those decisions.

[00:03:27] Ralph Estep, Jr.: Well now, let's get to the heart of today's episode and that's really simple. What should you consider when you're buying a business? And more importantly, how can you remove emotion from the equation? So I'm going to start with a very provocative statement. Emotion is the enemy of sound business decisions. Listen, I see more people make disastrous business decisions because they were blinded by excitement or the allure of being their own boss. And there was really no other reason. Let me paint a picture for you. Imagine you're walking down main street in your hometown. You're familiar with this area that you grew up and you pass that quaint little bookstore you love since you were a kid. The owner is outside, putting up a "for sale" sign. Your heart starts racing. You've always dreamed of owning a bookstore and now here's your chance. And before you know it, you're shaking hands with the owner, ready to sink your life savings into this venture. Stop right there. This is exactly the kind of emotional decision making that can lead to financial ruin. Let me tell you about my client, Michelle. Michelle was a successful marketing executive who always dreamed of owning her own business. One day, she came across a small struggling marketing agency for sale. The owner was this charismatic individual who painted a rosy picture of the agency's potential. And listen, Michelle was captivated. She saw herself stepping in, turning the business around and finally living her dreams. Despite my cautions about the agency's financials and the client base, Michelle pushed forward. She was so caught up in the excitement of owning her own agency that she overlooked major red flags. I mean, major red flags.

[00:05:09] Ralph Estep, Jr.: Six month after the purchase, Michelle was in my office, close to tears. The agency was hemorrhaging money, clients were leaving in droves, and she was facing a very real possibility of bankruptcy. Her story illustrates why it's crucial, I mean crucial, you've got to approach a business purchase with a cool head and a sharp eye. Let me share another story with you. And this one will really drive home the importance of objective analysis. I had a client who bought fitness center franchises. Let's call him Mike. Mike was a fitness enthusiast with a successful career in finance. He came to me, excited about an opportunity to buy three fitness center franchises in the area. The franchisor has given him impressive projections about membership growth and profitability. And Mike was already imagining himself as a successful entrepreneur in the industry he loved. He used the gym and thought to himself, well, I'm a customer. How hard can it be to be the owner?

[00:06:08] Ralph Estep, Jr.: I looked at the numbers and I saw several red flags. I'm talking about big time, red flags. The local market was saturated with fitness centers. There were big national chains there he was going to compete with. The projected membership numbers seemed overly optimistic. The build out costs for the center were significantly higher than industry average. And I also saw that the franchise fees and agreement to sell, it set up this health products lines. It wasn't ideal and he'd have to come and buy those at a very high cost. I said to Mike, listen. You're emotionally invested in this. I don't think it's the best thing you do, but guess what he did, he went ahead with the purchase. He was convinced that his passion for fitness would make the difference.

[00:06:50] Ralph Estep, Jr.: Fast forward two years, and Mike was facing financial ruin. The membership numbers were far below projections. I kind of told him that was going to happen. Expenses were higher than anticipated. Again. I told him that was going to happen, and he was struggling to meet his franchise fee obligations. Again, I don't mean to keep tooting my own horn, but I told him this. He ended up having to sell the franchises back to the franchisee at a huge loss. And it wiped out almost all of his savings. He lost all his money they put away for retirement. And if it hadn't been for bankruptcy, he would've lost his home. Turned out Mike made a really bad decision.

[00:07:30] Ralph Estep, Jr.: Mike's story is a reminder that passion alone isn't enough to make a business successful. You've got to look at the cold, hard facts. And more importantly, you got to be willing to walk away if the numbers don't add up.

[00:07:43] Ralph Estep, Jr.: So you might ask, "Ralph, what should I be looking at?" So here are some key factors to consider. Number 1 is the financials. This is truly the bedrock of your decision. You need to thoroughly examine at least three years of financial statements. You got to look at the revenue trends, look at the profit margins, look at the cashflow, cashflow is a big deal and look at the debt levels. If the business isn't profitable now, what concrete evidence is that it will become profitable. What magic is going to happen? While we're here. Listen. You need someone who understands financials to review these, and you need to find ways to validate the results in the financials. I have seen way too many times when a business seller fabricated financials that painted this rosy picture when the reality wasn't so great. You've got to do what they call in to trade your due diligence.

[00:08:27] Ralph Estep, Jr.: Now you can hire me to assist you or find a professional review it. I'll share my schedule and information later in this show. The second thing you got to look at is customer base. You've got to know who are the main clients. If the business overly relies on a few big customers, what's that customer retention rate. Is it a diverse, loyal customer base? If it is, it's more valuable than a few large accounts and that could leave at any time. See, this is something I've seen overlooked way too many times. I've told many prospective business buyers to kind of stalk the business they're looking to buy. Go there, become a customer. See what's going on. See what happens first in the morning. See what happens later in the day. You got to know what you're buying. You got to know who your customers are, and you got to know who's actually coming into the business.

[00:09:14] Ralph Estep, Jr.: The next thing you want to look at is market position. This is crucial. What's the competitive landscape like? Is this business a leader in its niche or it's struggling to keep up? What are the barriers for entry for new competitors? You know, you could buy this today and you might have five more competitors in a week. You got to study the market. You got to study the competition, and you've got to really understand all those things. Just because a business works in another market doesn't mean it will work in this market. This is especially true when you're looking at franchises. I've seen many failures like that, and they could have all been prevented if people had done their homework, stalked the business, understood it, understood their customer base and all that sort of thing. Another thing you got to look at is legal and regulatory issues. You got to wonder, are there any pending lawsuits or regulatory challenges? These could be ticking time bombs that destroy businesses value almost overnight. This is the time to understand the rules and regulations for the business. You got to know what will affect the business, both at the state level, as well as those local ordinances. This has caught many of my clients by surprise. And again, completely preventable.

[00:10:23] Ralph Estep, Jr.: Another thing to look at is employee turnover and culture. This one is massive. High employee turnover can be a huge red flag. it's going to have to answer a simple question. What's the company's culture look like? You got to ask yourself, will key employees stay on after the sale?

[00:10:39] Ralph Estep, Jr.: You kind of speak to these people. Now, most of the time, they'll be very honest with you. And you may have to take them outside the business for a coffee or lunch but let me tell you that's an investment you don't want to forego.

[00:10:50] Ralph Estep, Jr.: Another thing you want to look at is the growth potential. You've got to really study. What are the opportunities for expansion? Is that industry growing or shrinking. I've found that oftentimes sellers want to dump their business right before the drop to make sure they get the top dollar. Hey, you do the same thing. You generally don't want to buy a business that's in that phase. I've seen this happen way too many times.

[00:11:14] Ralph Estep, Jr.: Another thing you've got to ask, and this is crucial. What is the reason that they're selling? Why is the current owner selling it? You got to be skeptical of vague answers, like, well, you know, I'm thinking about retiring. Dig deeper into that. Ask questions. Once you ask those questions, ask more questions and once you ask those questions, ask some more questions. Listen, the truth is you can't ask too many questions. If they aren't willing to answer those questions, trust me, run the other direction because something's up.

[00:11:43] Ralph Estep, Jr.: And finally, you've got to study their operational systems. How well documented are the business processes? You got to ask yourself, can the business run without the current owner? Or is all the knowledge in their head? This is probably the biggest failure point. Truth is, besides not having enough cash, which is usually what causes a business to fail. Oftentimes it's because there's not a good setup of how the documented business runs. And this is why oftentimes I normally recommend the time period negotiate into the sales contract, where the owner's either on site or available as a consultant.

[00:12:17] Ralph Estep, Jr.: Listen, my dentist did that. My dentist sold his practice few years back and he was required to stay on for a year or two. I'm not sure exactly what it was for that transition. That was a wise choice for the new dentist. And guess what? Because they did that, I'm still a patient of that practice.

[00:12:34] Ralph Estep, Jr.: So you might be asking yourself, Ralph, how can I take emotion out of the equation when considering a business purchase? So here are my practical steps for that. Number one, create a detailed checklist. Before you even start looking at businesses, create a checklist of your must haves and your deal breakers. This will help you evaluate objectives. Objectively, it's going to help you understand what the opportunity really looks like from an objective perspective. Number two. Set a budget, but more important in setting it, stick to it. You got to decide in advance how much you're willing to invest in. Don't let excitement push you beyond that limit. There are times when you get so emotionally invested in something, but you set up a budget and you went well beyond it because I got to have it. I got to have it.

[00:13:19] Ralph Estep, Jr.: This one is another one that is vital. You got to seek outside opinions. Remember that Bible verse we started with? Getting advice from trusted advisors, including a financial advisor, somebody like myself, get a lawyer involved and ideally get someone with experience in the industry you're considering.

[00:13:37] Ralph Estep, Jr.: Here's another thing you must do. You've got to do your own market research. Listen, don't rely solely on the seller's information. Like I said earlier, talk to potential customers, talk to suppliers and even talk to the competitors. If it's possible, go ask them what they're finding in the industry. The next thing I'm going to tell you to do is take your time. You can't let the seller pressure you into a quick decision. A good opportunity today will still be a good opportunity after you've done your due diligence, and you might not fail if you do that.

[00:14:10] Ralph Estep, Jr.: And most importantly, this is the most important thing. You've got to be willing to walk away. No matter how much time and energy you're invested in evaluating a business, you got to be prepared to walk away if it doesn't meet your criteria. I've heard clients say this to me all the time, Ralph, I am so emotionally invested in this. I just decided to carry forward. Well, that was really dumb. If it doesn't make sense to do it, then you've got to be willing to walk away and maybe you lose some money. Maybe you lose some money that you paid for people to look at the product. Maybe you lose some money and the time you invested. Maybe some travel costs. Maybe you've paid some experts. Maybe you've paid for you know, a to figure out what the business is worth. Maybe you've done an appraisal. But you got to be willing to walk away if it doesn't make sense. Because the truth is this, buying a business is not just about fulfilling a dream or passion. It's a significant financial decision that can impact your life for years to come. It might wipe you out like it did Mike. It could be very great for you too and you might make a ton of money. But you've got to approach this with seriousness and objectivity it deserves.

[00:15:21] Ralph Estep, Jr.: So let me recap a few key points. These are critical. Always approach a business purchase with a cool head, not just passion. You got to have passion for it, but you got to have a cool head from the financial side. You've got to thoroughly examine those financials. Look at the customer base, look at the market position and more importantly, look at the growth potential. It's important to seek outside advice and be willing to walk away at the numbers just don't add up. That's where you create that checklist and stick to your budget to help you remove emotion from the decision.

[00:15:52] Ralph Estep, Jr.: I hope this episode has given you some valuable insights into the process of buying a business. Remember, it's okay to be excited about an opportunity. But don't let that excitement cloud your judgment. Now tomorrow we're going to tackle on another important topic. And that are, what are some ways I can learn to tame my tongue? Let me just tell you right now, I'm planning this episode for tomorrow. But it's going to be a lot of Ralph talk about in there. It's a subject that's relevant not just to our financial lives, but to every aspect of our walk with God. You don't want to miss it. I'm going to tell you about how I've dealt with it and some things I've done to help me.

[00:16:27] Ralph Estep, Jr.: And listen, if you're considering a major financial decision like buying a business, I'd love to help you navigate that process. Schedule an appointment with me by going to askralphpodcast.com/store and together we can ensure you're making the best decision for your financial future. My passion is to help you reach your financial and life dreams and live out your God-given purpose. If you'll want some guidance in your life, schedule with me now. I am confident I will help you. And I just want to say thank you for tuning into today's episode. Remember, with careful planning and God's guidance, you can make wise financial decisions that align with your values and goals. So as I always say when closing, stay financially savvy, and God bless you.