Five tips to finding the right business to buy

Every future business owner has a vision for their business.

Prior to starting the journey to acquisition, a buyer paints an outline that highlights their future business’ general characteristics—its industry, location, ideal cost and profitability. They contemplate their role in the business and imagine how owning a business will improve their lifestyle. 

When it comes time to actually search for a pre-existing business to purchase, a buyer’s outline is usually bare; they haven’t added any detail and traced lines remain unfilled. Before they can move forward, their outline needs colour—it’s time to turn that outline into a complete and defined picture.  

As a business acquirer, rather than squandering your time searching for a general idea, it's optimal to envision your prospective business in detail before leaping into your search. This way, you can ensure that you end up buying a strong foundation with all its blocks in place.

Finding a pre-existing business that meets, and goes above and beyond, your entrepreneurial vision can be challenging, especially if you haven’t specifically outlined the factors that define your vision. 

How do I find a business to buy that not only satisfies my vision but more wholly matches my needs as an entrepreneur? 

You have to define to refine

It’s indisputable; in order to find a business that feeds your entrepreneurial vision,  you must determine the criteria that will guide your search. Having a criteria may seem obvious, but ignoring details leads to frustration and disappointment. Crafting meaningful and specific criteria will be a significant advantage in your search journey.

These are the 5 essential factors that every buyer should define in order to refine their search criteria. Find the right business to purchase.  

1. Personal Drivers 

What’s at the heart of your entrepreneurial vision?—think about the things that prompt your desire and push you forward toward your professional goals.

Aim to pinpoint the key elements that motivate you to buy a business. 

Here are examples of motivating circumstances (You’re buying a business…)

• To work for yourself but to also utilize your managerial skills and professional strengths
• To diversify your portfolio, change your career and shift into a different industry
• To attain an easy going work-life balance, so you can spend more time with your family
• To invest recent financial gain or savings
• To become a CEO, investor, passive owner, or employee
• For job stability
• To generate capital

The key question that every human resource manager asks a new hire during a job interview is: why do you want this position at this company? The same goes for sellers; they want to distinguish you from other buyers because they need to find the right buyer who is prepared, educated and aware of how and why they’re going to acquire a particular business. 

2. Financial Ability 

As with any major monetary decision, it’s important to understand what you can afford and where the various funds for the acquisition will come from. There is a lot of flexibility here but you need to be prepared and understand your options.

Keep in mind, unlike home buying, business buyers first obtain capital for a down payment and then search for their target business before securing approval on any financial lending which can lead to major delays and low quality lending terms. It’s best to get a handle on what you can afford from the start with a solid understanding of a bank's lending process and typical leverage ratios they follow.

The key driver in the financing piece is the cash flow the target business will generate. This is the fuel that will provide you with long term financial stability and the part all lenders will look very closely at—it is your ticket to capital.

To echo the words of Walker Diebel, bestselling author and acquisition entrepreneur:

“Acquisition is more affordable than you think.”

When you purchase a business, you also acquire instant profit (pre-existing cash flow) from the business. Any loans or debt-servicing are immediately paid into through profits from the business. Therefore, by nature it can be easier to gain capital as investors know the value of their investment. 

How will you obtain capital?

• Personal savings
• Pooled income with partners
• From investors
• Money from family and friends

How will you gather lending?

• The bank 
• Investors
• Seller financing

What can you borrow against?

• Real estate
• Machinery or equipment
• Goodwill
• Inventory

3. Business compatibility 

What does your desired business look like? Beyond the business’ industry, location and cost, what does the business offer to you and what do you offer to it? Keep in mind certain businesses that you never envisioned yourself owning (perhaps divergent in industry or area) may, ultimately, align with your interests and be compatible with your search. 

Realizing the assets you want from a business is a prerequisite for knowing what sort of business you’re after and how you and a business mutually benefit one another. Acquiring tangible, intangible assets and goodwill deters the exponential costs, financial and timewise, that go into amassing resources for new businesses.  

Aim to pinpoint your expertise and the role you will play in the business. 

Tangible Assets
(Physical)Intangible Assets
(Intellectual Property)Goodwill
(Elements that Keep the Business Going)Brick and mortar, real estate, inventory, specialized equipment, daily materialsBranding, Website, Social Media Licenses, TrademarksReputation Loyal, Customer Base, Skilled Employees Management systems, Databases, Creative vision

Your ExpertiseYour RoleYour OfferManagement, Operations, Marketing, Branding, Construction Finance and Insurance, Real estate, Law, Creativity, CultureActive employee,  Active manager, CEO,  Passive ownerRevise management strategy, Strengthen operations Rebrand and diversify marketing reach, Renovate physical spaces, Increase property value, Bring new creative direction, Expand culture and community

4. Market Value 

The clear goal of business acquisition is to acquire a business with inherent market value. What sort of customer market does your desired small to medium business reach? Local, regional or global? Is the business treasured in its community? If not, will the business opportunity allow for innovation and slow growth?

Aim to pinpoint the factors that determine your desired business’ market value.

The BDC highlights that these components determine market-based value:

• Industry and location
• Market conditions
• Sales trends
• Size and maturity of the company
• Past and forecasted earnings
• Customer and supplier diversification
• Goodwill and intellectual property
• Owner responsibility and key employees
• Workforce engagement

While these specific factors are made clear later in the acquisition process, when searching it’s worthwhile to keep this information about the business in mind:

• Ownership or rental status of property
• Size of employee pool
• Management compensation
• Potential one time or recurring expenses

5. Expansion Potential

What kind of mark do you want to make on your acquired business? As a new owner, regardless of your role in the company, you’ll implement some sort of change in the business to motivate both financial, structural and creative growth.

Expansion fosters long-term growth for businesses. Identifying a business’ potential—its opportunities for expansion, regeneration and future growth—is equally important to defining a business’ immediate value. 

Aim to pinpoint a business’ possibilities for expansion.

Aim to consider how you can foster a business’ continual growth.

Possible factors of expansion may include:

• Implementing a new scope or direction for your business
• Merging your enterprise with another company
• Opening new locations or branching to different networks 
• Launching e-commerce 
• Entering new geographies 
• Developing new products and services
• Trademarking products 

Together, these 5 elements create a clear, in depth vision of your future business acquisition. Reference, apply and reflect on this criteria continuously throughout the search and due diligence phases in the acquisition process. Defining your criteria will refine your search, accelerate your process and equip you with a thorough understanding of what you want from an acquisition. 

Village Wellth provides you with tools, education and motivation, which, ultimately, lead you to make the right business acquisition decision. Recognizing and applying your criteria demonstrates to yourself, to advisors and to sellers that you’re prepared, driven to buy and willing to build a new future for your business. 

Searching for a business to purchase is often a black box filled with frustration; it’s rarely a smooth process. The most crucial part of the acquisition process—the search—is often the most overlooked. Village Wellth works to provide you the support and tools you need when you need them to turn frustration into determination.