When you buy a business, rather than start one on your own, you gain a variety of attractive advantages. Buyers don’t have to generate a business idea with a compelling value proposition or do the exhaustive work that comes along with bootstrapping a startup and going to market. Instead, buyers can choose to build on the work that’s already been done and focus their energy on improving an existing product or service.
However, there is one core challenge with this approach – choosing the right business to buy. While it might seem like a straightforward decision to outside observers, there are a variety of factors that need to be carefully weighed before entering into a purchase agreement.
With that in mind, let’s take a closer look at what buyers need to know in order to find the best type of company to buy.
What Kind of Buyer Are You?
As mentioned above, entrepreneurs can hit the ground running by purchasing a business that is already established within its market. In cases such as these, it makes sense for buyers to consider two things – the viability and market opportunity attached to each prospective business, and all of the specific way’s buyers can add value.
In other words, some sales may be driven by the strong performance and bright future prospects of an existing business. Other opportunities might be motivated by the fact that the buyer’s skill set, connections, and expertise are well-suited for the business and can help it break through to a new level of success. You’ll also find scenarios where both of these factors come into play.
Additionally, there are circumstances where more established buyers may seek to add to their portfolio of existing businesses. Here, deals may also be evaluated by a third yardstick – are there any opportunities to unleash synergies between the new portfolio business and existing enterprises?
Whether you’re seeking a standalone opportunity or looking to round out a portfolio, business brokers play a critical role in streamlining the buying process. The right broker has the necessary experience to ensure that all businesses under consideration are in alignment with the buyer’s skill set, experience level, and goals.
The Three Keys to Finding the Right Deal
When evaluating business acquisition opportunities, there are a few common factors that almost every buyer should weigh out. The three most important of these factors include:
- Existing Interest, Skill, and Experience Within an Industry – Having expertise and experience specific to an industry is an enormous advantage for buyers. While it’s not a prerequisite for success, the absence of a steep learning curve makes your success far more probable. Even the most brilliant people can’t make informed judgments unless they have prior exposure to the trends, problems, and history of their market. Interest is also key, as no business owner will last long within an industry or niche that they find utterly dull. The best opportunities come at the confluence of knowledge and enjoyment.
- Sufficient Capital and a Viable Financial Model – This includes everything from meeting your expected capital requirements, projecting your return on investment, and making nuts and bolts profit and revenue projections. Capital requirements differ from industry to industry, and buyers must be careful not to overextend. Buyers must also thoroughly interrogate the underlying financial questions and assumptions that support any reasonable business model. For example, how will the business generate revenue? How will it acquire customers? In what ways will the market be segmented? Buyers must also consider who will run daily operations – are they planning on being directly involved, or will they assume a more detached, strategic role?
- Up-To-Date and Thorough Market Research – A business that is thriving today may begin taking on water a year from now. Developments in technology might create new competitive forces, supply chain issues could disrupt operations, and broader economic change may make the industry less viable. By undertaking comprehensive market research, buyers can develop a short- and long-term projection of market health. This research will place a buying opportunity within a larger context, allowing buyers to evaluate not only a business but whether it’s the right time to buy, given the future trajectory of the industry.
Other Considerations for Buyers
If you’ve found a viable business in an area of expertise with strong long-term prospects, most of the elements are in place for a successful transaction. However, there are a few additional things to consider.
First, does the business align with your lifestyle goals? A business that demands close oversight and many hours of attention each day may not be well-suited for someone with an extensive company portfolio – or someone who wants to take a more passive role.
Second, are there any connections you can leverage within your existing networks? These business networks can be a source of strategic partnerships or even overlapping customer bases. Smart buyers will consider every angle before committing to a deal.
The groundwork for a successful business purchase is laid early. By considering all of the factors outlined above – and working with an experienced business broker firm when the circumstances call for it – you can ensure that all business deals you evaluate make sense personally and financially.