BUYING A BUSINESS WITHOUT THE EMOTION
Buying a business has many similarities to buying a stock. They both require appraising the value of a company to make sure that you buy at a price which will give you the ability to grow your investment and earn an income (dividend). A careful analysis will use many of the same tools for appraisal. [...]
Buying a business has many similarities to buying a stock. They both require appraising the value of a company to make sure that you buy at a price which will give you the ability to grow your investment and earn an income (dividend).
A careful analysis will use many of the same tools for appraisal. Both buyers will look at the multiple of earnings (P/E ratio), the multiple of revenues (p/s ratio). They will also look at macro trends within the industry of the business/stock and within the general economy. They will both look at what is the barrier of entry into the business.
There are many other similar yardsticks that are used to give the buyer a reason to buy or not buy. However, the one obstacle that will distort any analysis that either the small business buyer or stock buyer does is our emotions. Fear and greed always rule the day. I recently read something which I really liked. It is from www.prohostbiotech.com/news_details.php?news_id=564 . “In the stock market, negative speculators have the advantage of possessing a superior weapon called fear, which positive analysts do not really have. Under some circumstances, by definition, negative becomes the synonym of fear. When people fall to fear, they cannot wait for rational explanations of negative speculation. They believe they have no time to lose in resorting to common sense.”
I have seen this same fear cause a person not to buy a business which would have been ideal for him. The fear of failure is a very strong emotion for most people. It can work to our advantage by keeping us cautious when a situation seems too good to be true. But it also can keep us from taking action when a situation is really a good opportunity. If you a serious buyer, then you must also analyze your fears as objectively as you analyze the multiple of earnings and revenues. Otherwise, you will never be a buyer, only a looker.
I am a business broker with BizEx. I can be reached at http://www.bizex.net/business-broker/dan-munter or 310-882-2200 ext.121
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There is nothing wrong with emotion when considering buying a small business, in fact it is a very important element to have. The problem is that most buyers have what I call misplaced emotion. You want to have a strong emotional draw to the industry and the particular business so that when you go through a down cycle you will be motivated to ride it out.
Too many buyers are overly concerned about getting the “best deal” when they offer and they end up missing out on what would have been a great business for them over the long haul. This was because they were overly emotional about the immediate and not rational about the long view. Better to cry just once.