May 29, 2009

Know the Driver of the Business You're Buying

What's the Driving Force Behind a Business' Success?

Usually there's multiple forces that drive a business to succeed - several strategies bearing down upon a central tactic, method, or formula.  The more focused the business is in bringing it's strategies together to make the driving force behind the business (the secret sauce) move forward, obviously the better.

My concern is when I see businesses for sale that have unreplenishable, unsustainable drivers.

For example, a recruiting company that generates $3 Million in revenues and has gross profits of over $1 Million may sound like a great business to be in - good trends for the industry, solid financials, a superstar team, etc.

But here's the kicker.  The superstar team IS the problem.  If 50 percent of the revenues are generated by one team member, and another 30 percent are generated by superstar guy # 2, ... well, you see the problem.  I HOPE you see the problem.  The driver of the business is your #1 and # 2 guys who generate 80% of the sales between the 2 of them.  

Now, I love having a superstar team.  But I don't like being a hostage to them, needing them, etc.

Here are the things worth investing in when buying a business with sustainable drivers:

  • a reputable brand
  • a client or customer list
  • a proven operation or turnkey profits
  • sustainable, consistent, growing cashflow

Here are the things I try to avoid when buying a business, what I consider unsustainable drivers:

  • too much reliance upon one or two "superstar" team members (diversity/mix is key)
  • too much reliance upon too few customers (diversity is key)  (if the customer base has any one customer worth more than 20 percent of the revenue, run).
  • too much reliance upon a technology, product, or service (diversity is key)
  • too much reliance upon one or two marketing strategies for driving sales. 
  • unpredictable, unsustainable, bipolar cashflow (high highs, low lows)