The Biz Blog
March 30, 2010 by Dan Munter
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 https://www.bizex.net/business-broker/dan-munter or 310-882-2200 ext.121
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