If you are in the market to buy a small business, you obviously want a business that interests you and lends itself to profitability. Yet, you also want a business that’s suitable for you and fits your lifestyle. In essence, finding the best business to buy comes down to buying the best business for you.
Before you begin your search, you must first define your buying criteria and develop a clear picture of what you’re looking for in a business. You want to be very specific on the type of business you’ll even consider. Otherwise, you can waste a lot of time looking at businesses that won’t work for you.
Determine Your Lifestyle Needs
The best business for your best friend may not be the best business for you and your personal lifestyle goals. Do you want this business to be a side-hustle that takes up your evenings or will this business be central to your livelihood?
How much involvement would you like to have in the day-to-day operations? You can be very present in the day-to-day operations as an active investor or choose to be more hands-off as a passive investor by hiring people to run your business.
Will your business be a small “lifestyle” venture that supports your family only or will you grow it into a behemoth empire with an IPO on the horizon? Will this business complement or augment an existing business you own?
There are some business models that work well for each type of business and lifestyle objective, so you’ll want to choose one that fits your preference accordingly.
No one can answer these questions but you. Once you are able to pin down your lifestyle preferences, you’ll be in a good place to find the ideal business to purchase.
Define Your Skills and Strengths
If you’ll be buying a business, you should know exactly where you will fit into the equation. If you will be enhancing a business you’ll buy, you should know how you’ll do that. You might be excellent at marketing or computer programmer. How could that strength fit into the business you’ll buy?
Let’s say you are looking at a karate gym that has no problem attracting customers and generating revenue, but you notice the owner has a problem with keeping good records or getting repeat business. If either of these business deficiencies is your forte, it may be an opportunity to add value to the business asset.
On the flip side, a business that needs a strong management presence would not be ideal if you’ll be a passive investor or not willing to hire top-notch management personnel. The point here is finding a business where your knowledge and expertise will add value and equity to the business.
Determine Your Industry and Target Market
Once you pin down your strengths, you’ll want to research your preferred industry or niche. Certain businesses will thrive under very specific conditions, while others will tank. A fancy pet grooming shop in a working-class community may not be a good fit, just as a pool construction company in a cold-weather climate may not do well.
Understand the likelihood of capturing market share in a given industry based on current market conditions. You’ll also need to research market dynamics (like a changing neighborhood or regulations) along with impacts they could have on your business.
Finally, consider where your strengths and passions lay when choosing an industry. If your passion is growing revenue, a “boring” lampshade manufacturing outfit could do. If you’re looking at buying a rock-climbing gear store without much knowledge or passion, make sure you understand how you’ll remain interested and bring improvement to that business.
Select Your Location
These days, you can find a business almost anywhere with the help of technology. However, you’ve got to know the locations where you will be comfortable operating your business. Are you planning to relocate? If not, you’ll likely want something local. If you will be a passive investor or are considering a digital business model, location may not matter much.
Also, the industry you choose may also have a bearing on the location. There are some businesses that do well in some regions, but not so well in others. Take these points into consideration and select your location preferences so your buying criteria is specific enough.
Set Your Purchase Price and Terms
After you’ve pinned down all of this criteria, the last (or perhaps the first) determining factor will be purchase price and terms. You could find the perfect business right in line with your lifestyle and location preferences, but if you can’t afford it, none of that will matter. For this reason, you should have an idea of how much business you can afford from the outset.
However, just because a business is more expensive than you’re comfortable with doesn’t mean you can’t buy it. That’s where the terms come in. There are many buying arrangements you can make so that a business deal is feasible for your means.
For example, a business seller may offer seller financing or revenue sharing. There’s also the possibility of getting a bank loan to help with your acquisition.
The point is that you should be aware of both the price and terms that will work for you in the near term and long run.
Take Advantage of Technology
Now that you’ve created the picture of the ideal business you’ll buy, it’s time to start your search so you can make your decision on a business purchase sooner than later.
BizBuySell allows you to conduct very specific searches on thousands of businesses for sale. You can use advanced search filters to find listings based on characteristics like price, location, listing age and more.
Not only can BizBuySell help you find the best business to buy, the website is full of resources to help educate you through the process. If you’d like to know more about buying an existing business, check out the BizBuySell Guide to Buying a Small Business for more information.
Small Business Value Goes Beyond the Financials
When it comes to determining small business value, one of the most common question buyers ask is, ‘If I buy this business, how much money can I make?’ Yet, it’s important to look beyond the financial records when determining small business value. Oftentimes, financial records can be inaccurate or incomplete. Furthermore, they are intended to help minimize taxes, not show how well the business is doing.
Beyond the financials, here are some key value drivers to consider when buying a small business:
1. The Business Has Been Providing a Steady Income for Several Years
- A business that has been operating for at least 3-5 years is worth recognizing. This means the owner has been able to make some sort of living, plus pay business expenses, rent, vendors, and employee payroll.
- It also means gross sales are providing enough cash flow to keep the business running smoothly. Sales drive value. This is because the real bottom line of earnings (seller’s discretionary earnings or SDE) comes out of the top line of earnings (gross sales).
- A general rule of thumb for a small business that has been operating for at least three years and earns less than one million dollars in gross sales is that the owner’s benefit (SDE) could be anywhere from 10 to 20 percent of gross sales. Once a business earns over one million in gross sales, the owner’s benefit (SDE) goes down to 10 percent or less.
2. There is Potential to Grow and Expand the Business
- A business is more valuable if there is potential to grow post-sale. When evaluating a business, 30 percent of your focus should be on what the owner has done and 70 percent should be what you could do with the business.
- For example, it would be hard to scale if the owner is the backbone of the company as the business relies heavily on one person. For you to scale that business, you may need to put in a lot of upfront work to create process and systems to ensure it runs smoothly in your absence.
- A strong company brand — A business with a great reputation is more valuable than one that has been damaged by a crisis or poor service. A strong brand within the industry will be more scalable.
- Market position — A business that is well positioned from its competitors has a better chance of a strong market position. These companies have products and services that are well differentiated within the marketplace.
- Quality employees — A strong business has trustworthy and highly skilled employees. Those who remain with the company long term could impact the quality of the business.
- Business revenue model — A recurring revenue model could provide steady sales throughout the year versus ones that only make sales seasonally.
- Strong and loyal customer base — An established customer base is more valuable as they are most likely to stay put after the business has sold.
3. Running the Business Works With Your Desired Lifestyle
Purchasing a business is an emotional decision as much as a financial one. If you don’t like the business or it doesn’t work with your lifestyle, then it will never be a good fit no matter how valuable the business is.
Questions to ask include:
- Do I have the skills to manage the business?
- Is it in a location that I want?
- How often do I need to be physically present at the location?
- Will I need to travel often to meet buyers and suppliers?
- Do I prefer a wholesale or retail business?
- Is it the size I want (e.g. managing a lot of employees)?
Take the Time to Understand Small Business Value Drivers
Understanding the value a small business can offer for your income and lifestyle is paramount in determining what to look for when making a purchase. Once you’ve assessed the initial filters, take time to go visit the business and investigate further. You never know; the next business you visit could be a winner.