How to buy a bargain business

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BAG A BARGAIN: Entrepreneurs need to learn how to dodge duds and pick winners.

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The world's richest man, Carlos Slim, knows how to spot a business worth buying. Aside from thrift, drive and a killer instinct, the world's richest man, Carlos Slim, has another key trait. Mr Slim knows how to spot an undervalued business.

Boosted by his eye for a bargain, his US$50 billion ($70.7 billion) telecom-based empire includes some of Mexico's top department stores, along with restaurants, hotels and a bank, among other assets.

For any entrepreneur, buying an undervalued existing business appears a canny step to take. The turnkey growth approach means you leapfrog the start-up phase and open trading on completion. Into the bargain, you may get to keep staff who look a good bet for the future.

Thanks to existing staff, stock and clients, cash flow should kick in instantly. That is, if you have invested in a business with prospects.

The US$50 billion question is how an ambitious small business owner with an acquisitive streak chooses which business to pounce upon. Pinpointing a cheap, outwardly so-so business that is ripe to be turned into a cash cow or nice little earner can seem like a dark art that demands psychic input.

In fact, the essence of success is a simple but exacting due diligence mix of research and critical thinking.

Learn how to dodge duds and pick winners - a process liable to spur any latent tycoon leaning toward building their own mini-empire.

How to spot an undervalued business: five key secrets

1. Ask why exactly

Establish the reason that the business is on the market - the true reason: is it really retirement? The owner may be a shark hoping to palm off a problem - like a mega-chain rival's arrival in town - on an unsuspecting buyer.

Your dream of finding a turnkey enterprise that you can make even more prosperous will only blossom if you dig deep.

Consult anyone familiar with the business' past - local property agents and small business owners along with suppliers.

2. Dig behind the scenes

Get out and see the business in action. If you are thinking of buying a nightclub, say, watch how much traffic flows through the doors for a week - see if it measures up to the revenue that the owner claims.

Better still, ask the owner's permission to sit in on and "shadow" the business. Plus, talk to clients to learn their frank take on the service or product.

3. Talk tax

This boring step rooted in the dismal science of economics will factually ground your assessment. So, take a deep breath, and review the enterprise's tax returns from the past three to five years. The data yielded will shed light on how much profit that the business turns and whether any tax payments are owing.

4. Personally peg the price

Get a fix on how the seller arrived at an estimate of the business' value.

Conduct your own valuation and, if tempted to make an offer, be assertive.

A business' true worth may fall well short of whatever figure the vendor pegs it at. Learn if listed assets are free and clear of debts - a safeguard against inheriting morale-sapping fiscal baggage.

5. Stay picky

Screen out the business vendor's patter. Leaning toward paranoia, look for pitfalls. Investigate whether the flaws can be fixed or look set to endure and present a lasting headache.

Buying a business can be like hunting a second-hand cell phone; many are lemons. So, never be afraid to walk away - especially if the deal looks too good to be true.

Apparent stratospheric value can indicate a hidden ticking time bomb hitch that will one day trigger ruin. Be ready to bail and move on.

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