American Business Brokers & Advisor Founder & President PROFESSIONAL INTERMEDIARY & MARKET MAKER FOR PRIVATELY HELD COMPANIES Advisor • Consultant • Speaker Market Valuations Involved in Closing 500+Business Transactions & Over $500 Million Author of ‘The Art of Buying and Selling a Convenience Store’
The Number One Reason New Businesses Fail The Importance of Due Diligence
“Businesses are like relationships — they’re easy to get into but really hard to get out of.”
T here are 1,001 ways to run a business picked up on some of the key reasons why new businesses fail and how to prevent their failure. One reason is a lack of due diligence on the part of the new business owner. Many of my readers may know what I’m talking about. But just in case, here’s an example of what I mean. Say you want to buy a hot dog stand, but you don’t know anything about hot dog stands. All you know is you want to own one more than you want to invest in your current business. You’ll probably have some questions about how to run a hot dog stand for the current owner. What are the fixed costs? What do the day-to-day responsibilities look like? So on and so forth. This Q and A session is your due diligence — it’s doing your homework, and familiarizing yourself with what you’re getting into. poorly. I should know — in all my experience, I’ve had my fair share of business flops! But, through all my successes and failures, I’ve
a brand new Arby’s on it. It cost just under $1 million. After eight years and losing $250,000, we finally started to make a little money. So what did we do wrong? We never researched the business, the location, or really anything, and we ended up paying $250,000 worth of “tuition.” Tuition is what I call the money you lose while learning how to run a business efficiently. Every new business owner will have to pay some amount of tuition, but smart new business owners will try to minimize that cost by doing their due diligence. I’ve owned 10 different national franchises over the course of my career, and, after that Arby’s debacle, I do my homework when I decide to buy a business. That usually involves calling other franchise owners who aren’t in my territory and asking them about the positive and negative aspects of the business. That being said, some of the best business deals I’ve ever made are the ones I never made. Humans are emotional creatures. In the heat of the moment, I’ll think my idea for my next business venture is foolproof. But even then, I’ll write it down on a piece of paper and sleep on it. Many times I’ll wake up, wonder what I was thinking, and ultimately save myself lots of time and money. Businesses are like relationships — they’re easy to get into but really hard to get out of. Don’t let your emotions overtake your common sense and don’t take any business venture at face value. If you do your due diligence, you might just save your money and your business.
So what happens when you don’t do your due diligence to the extent necessary to successfully
run your business? Well, I learned the answer from firsthand experience. Back in the 1980s, my business partner and I wanted to get into the restaurant business. We had never owned a restaurant before, and we knew absolutely nothing about the industry. I was in the oil business, and my partner was a lawyer. It was a recipe for disaster. We ended up buying a piece of property in a St. Louis suburb and building
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