Due Diligence & Buying a Business.

I was reading through an Old 2010 NZ Retail magazine and found quite an easy to understand article on due diligence and buying a business. I have included it in this blog as I have been asked many times recently about buying business the right way and what to look for. And although this process can often be complicated and and this artile is perhaps a fraction over simplified, it remains true that we shouldn't really just trust the 'pitch' and books shown to us by the seller. The article contains some easy to grasp key pointers.

The one area it doesn't focus on is branding. Many over spend upon startup. The best branding results are achieved when the process is carried out 3 years into operation. This is because at the point of startup a business owner will have vision, passion and intent, but as you run the business the operation and opportunities have to be focused on. From my experience it is usually about 3 years into a business life that you still have the passion and intent but now also have a realistic understanding of your target market and their wants and needs. At startup you definitely need an effective logo and collateral but make sure you don't get talked into spending $10,000+ on a brand and positioning package from day one. It is impossible to get the best results as much of the process will be based on projection and assumption.

The article also mentions fixtures and fittings. This is an area that is vital to get advice on and not from the builders and fitters themselves. Generally shop fitters are geared up to sell you what they can build and what is fast and efficient for them with maximum margin. This usually means that many of their shop fit-outs look similar. Ideally you need an brand experience consultant to ask the questions and steer you in the right direction. Let them ask the hard questions of the potential shop fitters and let them use their contacts to stretch you dollar further. Brand consultants such as OBD are not bound to only what they can build, they are free to find and use the fitter that best suits your needs and makes your shop the BEST destination and experience it can be,

Due Diligence.
There is no right time to establish or buy a retails business.
But there is a right way of going about the process.

Over the years, I've dealt with many people who have bought or established a retails business on the back of a hobby or something similar.. In some cases, blind passion has overruled sound judgement and their dream business has turned into a living nightmare of unexpected costs, excess stock and zero cashflow.

Why? Because they didn't do their homework and they didn't ask the right questions of the right people. But before drilling down into retail detail, ask yourself a simple question, why bother?

You need to be clear from the outset why you want to go through the involved and, at times, stressful process of starting a retail business. The question is especially important if you are embarking on the setup with another person. If you're looking at the project as a five year business proposition, but your partner considers it an all-encompassing lifestyle option, I'd suggest you reconsider the long term future of such a venture. We all have different personal and business aspirations and it's important to clarify these before proceeding.

The Retail Detail Questions:
Who is my target market?
In other words, who will buy what you plan to sell? Be specific and identify your potential customers by age, income and key lifestyle characteristics.

What is it my target market wants to buy?
You might think you know the answer to this question, but don't be influenced by your own personal preferences. Seek advice and input from other sources - such as suppliers, like-retailers in other regions and people directly identified in your target market.

Location, location, location?
In most cases, you're best to go for a location with regular foot traffic that's other competitors. You might consider a less high profile site if you have a 'destination shop' that people are drawn to because of the special product range and/or shopping experience you offer.

Suppliers
This is an interesting one that takes time to get right. You could ask retailers from other towns selling similar product lines for suppliers contacts. Also take a look at acourt which has contacts and details for a wide range of products and brands. Suppliers will expect upfront payment for the first 2-3 months. Once you feel you have proven a track record and a good working relationship, negotiate the terms of trade.

What about budgets, cash flow, turnover and all that?
Yes, you'll need a budget that itemises how much you'll spend on setting up the business and a cashflow estimating income and expenses once you're up and running. A general rule of thumb is that you'll need to achieve an annual stock turnover of 3.5%. (If you don't understand this concept give me a call.) Don't sweat the financial details on your won, get alongside a retail-focused accountant.

What about the shop fit-out and fixtures?
Shop layout, lighting, point-of-sale systems, shelving, flooring... all are specialist areas and the internet and Yellowpages will help point you in the right direction.

Who can help?
The NZRA is a good start, but you'll also need to tap into retail knowledge. (OBD Creative Studio is a great fit) You'll need a lawyer and an accountant, but don't settle for the first listed in the phone book. Ask questions of any potential candidate,checking that they have relevant retail experience. (RSM Prince is fantastic) Finding the answers will take longer than you think. I worked with one person who spent more than six months working out the viability of a new retail concept; but his homework paid off because he's still in business three years on.

The key in the retail start-up process is to keep asking questions - and listening carefully to the answers given.

Brian Finlayson is a memeber of the New Zealand Retailers Association (NZRA) advisory team.