One of the most useful tools to examine the current state of a business and where it might go in the future is to do a SWOT analysis. Let’s examine why.

The Definition of A SWOT Analysis

SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats. Through a structured methodology, you can evaluate how a company fares in those four areas.

Let's have a closer look at the four categories that make up a SWOT analysis.

Strengths

The strengths are the attributes and characteristics that give the business an advantage over its competition. They are tangible and intangible qualities that are within the company's control.

Strengths can be found in areas like marketing, manufacturing, finance, and organizational structure, as well as in the positive attributes of the people associated with the business. Some other tangible strengths could include working capital, the established customer base, patents and copyrights, and distribution channels.

Weaknesses

The company's weaknesses are the attributes and characteristics that put it in a disadvantageous position compared to the competition. These too are factors that are within the business’ control. They are the areas where the company could improve.

Some common weaknesses can include limited resources, a lack of internal expertise, inferior product or service offerings, and a poor location.

Opportunities

Opportunities are conditions of the marketplace or business environment that could be exploited by the business to create a greater advantage. They are entirely external factors that are beyond the control of the business.

Examples of opportunities include lifestyle changes that make your service or product more attractive to customers, market growth, and a rising problem or issue that your business can help solve.

When examining opportunities, it's important to consider if there's a timeframe associated with it. While it may be that it's an ongoing opportunity, more often than not, you'll find that there's only a finite window that may or may not have an explicit deadline.

Threats

These are the conditions of the marketplace or business environment with the potential of causing harm or difficulty to the business. They are factors that are beyond the control of the business, and they may necessitate a contingency plan in case they come to fruition.

Factors that could pose a threat to the business include current and possible future competition, significant increases in the cost of materials, changes in the economic landscape, changes in consumer behavior, and the introduction of a new product or service that makes yours obsolete or less desirable.

How to Perform A SWOT Analysis When You Want To Buy a Business

On a blank sheet of paper divided into the four categories, list the internal strengths and weaknesses of the company in point form. Then, consider external opportunities and threats that could affect the company and list those in point form in the appropriate section.

It's a good idea to involve other stakeholders in the SWOT process, like the seller and key employees, to gain a broader perspective and have the most accurate view as possible.

With a clear understanding of a company's strengths, weaknesses, opportunities, and threats, you can begin to assess how well a business might perform in the future. You can begin to formulate an action plan that will help you use the company's strengths to exploit opportunities and mitigate possible threats. You can also come up with plans to improve weaknesses.