Buying a new business or starting one from scratch; which one is smarter? The argument is unresolved for the most part because both require a massive amount of time and resources, with no definitive way to predict what will succeed.
However, many people believe that buying a preexisting business can provide more security and assurance because of the ability to audit and research the company. Just because people believe buying a business is safer, doesn’t mean it’s easy. The steps needed to buy a business successfully are not for the faint of heart.
If you’re considering purchasing a preexisting business, here are some tips to get you started. Remember, the health of a business isn’t discernable by the paint on the walls or the theme of their website, it’s found in their books, employees, client base, product/service, and processes.
Determine the industry and business
Similar to launching your own company, it’s important to find businesses in industries and niches that you’re passionate about. Buying a business in an industry that you are committed to will motivate you more than just pursuing a company for profit alone.
Profit and passion are not mutually exclusive, meaning you can find companies that will provide good returns in industries that you care about.
How do you do that? Easy, you look for businesses that provide solutions to problems. In its purest form, businesses that are able to provide real solutions can sustain value for their customers. When it comes to purchasing a preexisting business, look for companies that solve problems for their customers. The bigger the problem, the more valuable the solution.
If you’re purchasing a company, you also need to consider other tangible factors that affect your ability to run the company. These factors include:
- Location: Is the company you’re considering buying located near you? If you will need to move to run the company, it will require personal expenses. If it’s in a new location, you may be less familiar with the market, thus requiring additional research. The company may also have multiple locations, which means you need to delegate leadership to each location.
- Employees: Employees are one of the most valuable assets you acquire when buying a preexisting business. Take time to know who you are purchasing because they will be the heart of the company and what keeps it thriving after you buy.
- Processes: One area of a company that you won’t find on the balance sheet and often don’t hear enough conversation over is the company’s internal workflow and processes. When you are buying a company, take the time to look at how efficient the company is. Can you improve workflows? If so, you may be able to generate a faster return on your investment.
Defining what company and industry you want to operate in is the first step in purchasing a new business.
Ask the right questions
When buying a business, no question is irrelevant. This fact is particularly true when discovering why a business is being sold. Most business owners cling to their company with all their might because of the blood, sweat, and tears that they invested into building it. So, when they are willing to sell it’s important to understand why.
Ask the owner as many questions as you can, leave no stones unturned. Some questions you need to ask before a buying a business involve the valuation of the business, current and future market demand, business formation, management regrets and challenges, and any other questions that can provide assurance to you before purchasing.
Make sure to pick the owner’s brain about the current and future of the company and industry. Ask what steps need to be taken to grow the business beyond its current state. Often, these owners are keenly aware of what needs to be done to move the business forward and even if you don’t use their strategy, you can glean a lot from their insight.
Find and consult an expert
Great businesspeople are able to delegate responsibilities to others with more experience and expertise. This ability is critical when purchasing a new business because there will be times during the valuation process where you will need to consult an expert. Whether that includes hiring business consultants to help valuate a company or using a business broker to facilitate the finding and purchasing of a business, it’s important to utilize the resources at your disposal.
An expert business broker can prove to be an invaluable asset for people looking to buy a new business. These brokers can provide you with updated lists of available businesses for sale, they can be an excellent buffer between you and the seller, and they can handle the paperwork that goes with buying a new company. If you’re considering buying a business, it’s also worth looking into hiring a business broker.
Consulting an expert doesn’t begin and end with a business broker, you should also consider finding experts for different areas of the company or industry for which you are looking to buy. For instance, if you’re considering buying an eCommerce business, you may want to consult an eCommerce expert before moving forward with the company
Don’t be afraid to ask for help, finding and utilizing resources are critical steps for successfully buying a business.
Do a proper valuation
Assets depreciate. Liabilities increase. Expenses can be undervalued. Revenue can be inflated. Receivables and payables can be wrongly estimated. Any number of financial miscues can result in an improper estimate of a company’s value.
Properly valuating a business is one of the most important parts of the business purchasing process. If you’re not a financial expert, it’s highly recommended that you hire a CPA to help audit the financials of a potential business.
Conducting a proper business valuation will help mitigate any financial concerns before you acquire the company. The last thing a new business owner wants to discover is that the company they purchased was fiscally irresponsible.
Valuating a company’s current financials is vital, but so is evaluating the industry in which the business operates. Using a resource like IBISWorld can be an excellent way to discover insight about the volatility of an industry. You can also read 10-K reports of publically traded businesses in the industry to discover not just the market potential of your company, but the current financial environment of said industry.
Look at recurring revenue
Recurring revenue is the portion of a company’s revenue that is ongoing and will likely continue after you’ve acquired the business. This represents the returning customers of the company the client base that will come with the business.
The cost of acquiring new customers is substantial and if the company you want to purchase is struggling to retain customers, it’s important for you to discover why. If customers are not repurchasing because of a poor product or service, then you may want to proceed with caution.
However, customer turnover is not always a bad sign. Some industries and businesses are not built for repeat purchases. Also, some companies provide a great product but don’t have internal processes to retain customers. If this is the issue with the company, then it should be considered an opportunity and not a liability.
In speaking about how to buy and sell a business, Dave Negovt, co-founder of Hubstaff, had this to say about recurring revenue:
Recurring revenue is crucial to building a million-dollar business. It’s a key factor in creating a business that scales.”
Some businesses are built solely through a recurring revenue model or subscription-based product offering. If you buy one of these businesses, you should have a good idea what your short-term ROI will be. This provides more assurance and safety for new business purchases.
Buying a new business can be one of the biggest decisions in a person’s life. It’s important to take precautionary steps to help mitigate any issues that can come with the acquisition of a new company. Making risky investments can pay off, but more often than not – the person who takes the time and conducts proper due diligence will be the one that comes out ahead.
A combination of caution, resource utilization, and attention to detail will help anyone successfully buy a new business.