As a student, how can you think about properly evaluating a business opportunity? In particular, what is a rigorous approach to evaluating the risk in buying a business and to properly evaluating that business.
The approach suggested in the solution can be adapted to other types of business analyses, which you may be asked to do as part of your business or entrepreneurship courses.
EVALUATION GUIDELINES FOR BUYING A SMALL BUSINESS
One of the core questions about buying a business is how much should someone pay for the business. While many factors go into this decision, there are some guidelines that will help the buyer in determining whether to proceed or not. The purpose of Sections 1 and 2 are to outline key issues bearing on this decision.
1) Assess your readiness to own and operate this business:
a) What do I know about the business you're buying or industry your going into?
b) What is my experience in:
* Sales & marketing
* Finances and record keeping
c) Assess your comfort level/experience with financial management.
* Gross Margin * Gross Profit & Net Profit * Break-even point
* Turnover * P & L Statement * Cash-flow Analysis
* Accounts Receivable * Accounts Payable * Terms of Credit
If I do not know the meaning of these terms, where do I get the information?
d) Assess your knowledge of the industry:
* The competition and their location
* Where my potential customers or the market is
e) Assess your knowledge of and experience in the business I'm buying:
* Track record of the business - sales, expenses, profit for the past 3 years.
* If decreasing, why?
* Do they have a lease?
* What are the terms of the lease in time and cost?
* Do you assume the current owner's lease or do will you have to sign a new one?
* Are you buying real ...
The solution provides a lengthy listing of questions to ask, documents to review, research to conduct and analysis to be completed. It is a comprehensive approach.