Due Diligence

One of the most common mistakes people make when buying a business is in their analysis of the marketing activities, strengths and weaknesses of any business for sale they are considering.

It doesn’t matter whether you are thinking of buying a business for $100,000 or ten million dollars, understanding its marketing practices is crucial.

However, the mistake made most often by buyers is they spend their time targeting all of the so-called wonderful things they are going to do to improve the business after they take over instead of effectively analyzing what the company is doing presently, or has done in the past.

Often times, this thinking overshadows the reality of the business, and can result in a buyer lulling themselves into believing they can implement certain changes, that may not necessarily materialize as they had envisioned.

Obviously, it is important to identify growth opportunities in any business being considered. But, too much focus on the upside can often derail a deal. If a buyer becomes too consumed with areas to grow the business, they will typically run into obstacles during their investigation that may upend their plans. If this happens too frequently, they may sour on the deal altogether, and decide against buying the business., when in fact they may be walking from a good business.

When evaluating marketing opportunities, the main consideration must always be whether or not you are starting from a solid platform. That is why buying a business that has all the fundamentals in place to assure its stability after the purchase, is more important than fantasizing about the things one can do to make the business better in the future.

Buyers are frequently surprised to learn that a business for sale doesn’t have a marketing plan.

Instead of a concrete plan, it has simply evolved into doing to same old thing year after year, with similar results, and the owners do not seem to mind the monotony. Unfortunately, in today’s business environment, businesses that cease to look for ways to grow generally are poised for a decline.

Conversely, the actual marketing plan may simply be in the owner’s gut. They understand the business intimately, and know what initiatives they should jump on, and which they should avoid. In businesses where the owner has run the marketing with a “gut feel”, you need to determine whether or not that instinct can transition to you as the new buyer. Better yet, can you translate that “know-how” to a written plan?

You will want to learn about the past marketing initiatives that the company undertook, and what were the results. You may be shocked to discover that marketing is just an afterthought for the business. I find this to be quite common in retail businesses, and especially those that rely heavily on its location. It is almost as though the owners just sit there waiting for traffic to come by. In these cases, you need to determine what, if anything can be done to get more people through the door. If in fact the business is helpless in this regard, do not fool yourself into believing you will have any more success.

As you look at any business, avoid trying to visualize for grandiose schemes to build the business. Instead, look for fundamentals that can ultimately be leveraged into growth.

For example, the simplest way to grow a business is to generate more revenue with the existing client base. It is always easier and less expensive to get customers who know you to buy more, than it is to acquire new customers. No matter what the business may be, there are always additional products or services that you can offer.

Look for competitive advantages. Why do customers buy from the business versus the competition? If you cannot identify a very clear reason, this can be a very worrisome sign. The business landscape is more competitive than ever right now, and it will not ease up anytime soon. Unless the business offers something that cannot be readily purchased elsewhere, rest assured that customers will shop around.

Does the company compete mainly on price, quality or service? It is impossible to be do all three. Whatever it is, what else can you do to exploit it?

Can the business be expanded geographically? Does it make sense to open up a second location? If that seems obvious, why hasn’t the seller done so? Or, maybe they have and it failed. If so, why? If additional locations would seem to be a logical path to grow, spend the time to determine how much it will cost to do so. Can the existing cash flow support expansion? If not, how will you access the funds needed?

Are there mechanisms in place to test and measure new marketing projects? This is the single most important aspect to marketing, and so if none exists, you will want to be certain you set them into action.

Has the company tested new price points? How did they arrive at the current pricing schemes? How often can, or do they raise prices? Clearly, if they operate in a highly competitive marketplace, this may not be feasible.

Marketing is not a big mystery. In fact, it is quite simple. It is strictly the ability to determine who is your prospect, what that they want, how much will they pay, and how can you get it to them. That’s it. However, it does take some work. Most often, you really need to get immersed into the business so that you too can get a true “gut feel” for the business.

Once you marry off that instinctual understanding with an actionable plan, you can grow any business. So until that time, while looking at any business to buy, focus on its core elements to be certain you have a rock-solid platform from which to grow. After all, it is always easy to deal with the upside, but you need to be certain there will not be any downside once you get the keys to the business.

Have a great week and I look forward to your comments. If you like what you’ve read here, please visit Diomo.com where we have many additional helpful articles on buying a business for sale.


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