Choosing an Industry
A quick blog post that may be useful if you are thinking about purchasing a business. There are many critical decisions that need to be made before you are at the state of making an offer, one of these choices is what industry should you operate in. Below are a few items to think about to help with the decision of choosing an industry.
Projected Growth Rate – is the industry as a whole growing or shirking? No sense getting into the pay phone repair business; even if the company you are considering did well over the last few years. You want to ensure the industry as a whole has a positive future.
Barriers to Entry – If the industry the company operates in, is difficult to break into, this is a major positive. For instance, the company may have patents or proprietary technology that put them at an advantage. Understand this advantage may be reflected in the price.
Working Capital – Does the business require a lot of working capital? If it is in manufacturing, it probably does, if it is a service based business it may not. If you plan on putting most of your cash into a down payment, you may not have a lot left over to dedicate towards working capital. This may push you into industries that need less cash on hand.
Average Returns – Although each business is different when it comes to rate of return, overall industries have averages when it comes to the bottom line. If you are looking to maximize the return on your money, choosing the right industry has a lot to do with this. For instance, the tec industry has an higher rate of return on average, but it also is a faster paced industry and see’s more business failures. So there can be a tradeoff to industry returns, but they should be considered and not discounted.
Working Environment / Operational Hours – What is the perfect work environment for you? If you don’t like working long hours into the late evening, then a night club will not be a fit for you. On the other hand, if you enjoy a fast passed busy environment, with mostly cash transactions, perhaps a night club is your thing. Choose an industry you want to be a part of. It will make you happier and more productive in the long run.
Fit with your Interests – Lastly, and not mandatory, you want to choose an industry you are passionate about. This will help you love your work and be able to get through the tougher times without getting burnt out.