Why most librarians aren’t rich

by Scott Bushkie

I recently came across a Warren Buffet quote that struck me: “If past history was all there was to the game, the richest people would be librarians.” Don’t I wish that were true. My mom was a teacher for 30 years, and she knew a lot about history.

When it comes to buying a business, past performance is important. As a buyer, you’ll typically look at the last three years of financials, with a particular focus on the trailing twelve months. But you can’t get so tied up in historical numbers that you forget to ask the right questions about future performance.

Here are some key areas to investigate to make sure you’re buying a business with potential. Because at the end of the day, you’re not just buying assets. You’re buying a business that must generate future cash flow.

Management team
At the appropriate time, ask about interviewing key managers. Do they plan on retiring soon? Do they have a track record of job hopping? How long has the leadership team worked together? Areas for growth? What’s their vision for success, and does it match with yours?

Culture
While closely tied to management, culture is a separate issue that impacts where new ideas come from, how well change is embraced, and how long employees might stick around under your leadership.

Customers
Review the top 10 customers and their percentage of sales for the last three years. Get a feel for stability, satisfaction, and market trends. What end market do they operate in? Are those industries mature and flat or emerging with annual growth?

I’ve even seen some sophisticated buyers hire a research firm to call on a business’s customers on the seller’s behalf. They make no mention of a future sale, but instead ask customer satisfaction and forecasting questions. How are we doing? What could we do better? What could affect the amount of business we do together?

Those answers would provide significant visibility into customer retention and future sales. (But be advised: never engage in customer interviews without seller’s written consent.)

Maintenance
For a manufacturing business, ask about equipment maintenance records and expected life. It would be unfortunate to buy a $10 million business only to find out a key piece of equipment, while “in operation,” in actually on its last legs.

Capacity
Look at how much room you have to grow with existing equipment and facilities. Future performance will cost more if the business is already bursting at its seams.

Whether you’re a corporate exec buying a $1 million company or a $100 million corporation buying a $30 million operation, these principles remain true. These answers aren’t going to show up on a P&L or balance sheet, but they’ll have a significant impact on the overall success or failure of any acquisition.

Share on Facebook0Share on Google+0Tweet about this on TwitterShare on LinkedIn0Email this to someone
mm

A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.