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How to Investigate a Business before Buying the Company

Part of the Business Valuation For Dummies Cheat Sheet

Research, observation, and common sense are powerful tools in the business valuation process. Here are some things to consider as you examine and analyze a company you want to buy:

  • Listen to customers. Assuming that you’re targeting a consumer business where you can legally do some creative loitering, spend some time listening to customers talk about what they think of the business.

    If the target business is a restaurant, strike up casual conversations in the waiting area about whether customers have come here before and, if so, why they’ve come back. Don’t be a stalker; just find the right approach. If you find several people on repeat visits who volunteer how great the business is, or what they like and don’t like about it, start recording those comments.

  • Watch the foot traffic. Pretend that you’re a plainclothes detective for a few weeks. At different times during your target company’s business hours, park the car or sit in a coffee shop across the street, and set up a chart that notes the time, date, and segment of time you’re watching. Note when the business gets busy; note when it’s dead. Note what kinds of customers are going in, and try to find out why.

    If the business is a clothing store, are shoppers showing up only when a sale or promotion is going on, or are their visits tied to crucial shipments of merchandise that they can’t wait to see? Professionals get paid a lot of money to do this kind of observational research; you can do it yourself for free.

  • Check out the neighborhood and competing businesses. What’s the character of the street and general area where the business is located? Does the street have a lot of other businesses similar to this one, and where is it on the trendiness and necessity curves?

    Does the neighborhood really need this business? Is the area gentrifying (people with money are moving in) or already gentrified (serving the clientele with the most disposable income that would go into your cash register), or could it be slipping, with dollars going elsewhere?

  • Diagnose the empty-storefront issue. Empty storefronts may not always be bad things. Storefronts may be emptying because the neighborhood has a growing crime problem and residents are fleeing (definitely bad for most businesses, even for non-consumer businesses that want to attract a workforce).

    Alternatively, storefronts may be emptying because a quiet real estate boom is going on in the area, and landlords feel that they can charge rents that more upscale tenants are willing to pay to attract a rising clientele.

  • Study the local power base. Identify the politicians who are lowest to the ground where your target business is. Study what they’re doing — and not doing — for their business constituents. See whether the area has any nonprofit groups that aid local businesses, and find out as quietly as you can what data and intelligence they can provide you in your research.

  • Do a news search. You know those boring columns in the business section with the dopey headshots, talking about how Joe Jones just got a big promotion? These columns can get pretty interesting when you’re thinking about buying a business.

    Search for any news story that features the name of your target company, and look for good news (expansion, new locations, talented new executives) or bad news (locations closing, top management quitting, lawsuits filed by customers or suppliers).

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