There are three main reasons to buy a business:
- You have capital to invest, and businesses are a good way to turn your money into more money
- You want to be a business owner: for the challenge, the autonomy, and of course, the money
- Strategic reasons IE you already own a business, and want to expand
Note: To clarify, when we refer to buying a business in this context, we’re referring to buying business assets, not stock.
Buying a business is a long process that demands much of your time throughout. That being said, you’ll want to know there’s potential before you go any further and sink more time and effort into the process.
The first thing you need to thoroughly investigate is why the owner of the business wants out. Make sure the reason they’re leaving is not poor profitability or growth potential. As far as good reasons go, they could be tired of their current trade, or they could be tired of business ownership entirely. We can safely assume they’re selling for capital. Is it so they can start a new enterprise, or to invest in some other way? Maybe they just want more freedom. Maybe they’re ready for retirement.
You can get a more detailed picture of this by asking another question: What, exactly, are they hoping to get for their business? Why do they need that? This should line up with their reasons for leaving.
The responsibilities and challenges that the current owner is trying to escape are going to become your responsibilities and challenges if you take over. This is especially important to be aware of if you weren’t looking for a business when this opportunity came along. Be sure you’re interested in handling the responsibility, and in a position to do so.
What to consider
View buying a business as an investment. Do your due diligence and understand the risks you’re taking. If you can’t identify them, its not because they aren’t there. You can call on a professional for help in assessing the risks and rewards.
Do the research to be sure that the business is going to perform as usual once the current owner is out of the picture. Something investors look for is an operation that is not overly reliant on any one team member or customer. What if 70% of your sales up and vanishes because one major customer doesn’t want to deal with new ownership? Or what if that customer is loyal to an employee that refuses to work for new ownership?
In business, its grow or die. Sadly, you won’t survive if you try to indefinitely stay in your lane with cruise control on, keep your handsome little market share, and just watch the money roll in month after month for years on end. The competition is always looking for ways to steal your market share. How? By providing value that you’re not.
So look at the addressable market. Then, look at how hard it is to actually win in the market by checking in on the competition. You’ll need to know if the company is in a position to compete for leads/sales. And just because they’re not competitive now, doesn’t mean they can’t be revamped. But you’ll need to know the costs of gearing up, as well — and the risks of not succeeding.
Even with best team in place, there is some level of involvement required for you, as the owner. With this particular investment, you need to invest more than money to get a return. Make sure you understand how much time is going to be required of you, so you can determine if owning the business will fit with the lifestyle you want and the other obligations you have.
Not only do you need to acquire a profitable business, you need to know when you’re going to get an ROI for the money you put down to acquire the company. In short, when are you going to get out of the red with your investment? How is the deal going to be structured? How will it be financed? How much debt are you assuming, and how soon will profits pay that off?
Make sure you understand the value proposition of the business. Understanding means that you can explain it to somebody who knows nothing about the business or industry. What does the business do for customers that they can’t do as well for themselves? Why are customers willing to part with their money? And why do they choose this brand over the rest?
Does the public (or at least the customer base) understand the value proposition? If not, that could indicate room for growth through improved marketing. It could also indicate that there just isn’t much market for the product or service. A good product sells itself, because it solves a problem that its customers are familiar with.
Time and cost in the deal itself
Finally, understand that the process is a lot of work, and aspects of it should absolutely not be done without the help of a professional. Buying business assets is not as simple as buying a car, trading stocks, or even buying real estate. The deal itself could take as long as year to complete, so weigh this against the upside. For more on the actual process of buying a business, you can read this article.
Finally, keep in mind that when it comes to the sale price of businesses, market value is subjective. Its important to understand that there are no standardized ways to price a company. There are common valuation tools, which are essential, but they’re not conclusive. To learn more about how those work, you can see this article.