How Do You Find The Right Business to Buy With the Help of a Broker?
Buying a business is a tough decision, and finding the right one can be hectic. Understanding the whole process thoroughly and taking the help of professional business brokers at the right time can make buying the right business easy. Irrespective of the type of business you buy, following certain steps can enhance your chances of successfully operating a profitable venture once the deal is closed. In this blog, we’ll guide you through crucial steps to find the right business.
Table of Content:
- Deciding What Type of Business You Want to Buy
- Understand What Type of Buyer You Are
- Understand Ways to Become a Business Owner
- Business Analysis Before Buying
- Due Diligence: Ensuring a Wise Decision
- Conclusion
Deciding What Type of Business You Want to Buy
Start by narrowing down your passions, interests, skills, and experience. For first-time buyers, it is highly recommended to buy a small business with the help of an experienced business broker. Unlike what many believe, there are several opportunities for an owner when he/she chooses to buy a small business. Entrepreneurs use the acquisition to purchase their company using a combination of debt from banks and equity from investors and pursue the purchase so that they successfully retain a meaningful economic stake in the business. With such a stake, you have the opportunity for a significant financial reward. purchasing small yet high-quality businesses for a price that allows you and your investors to earn an excellent return on investment.
To truly grow your business, you need to carefully assess the skills and experience of your relevant industry, understand where your interest and passion lie, and even consider how the business ownership lifestyle aligns with your desired work-life balance and financial goals.
Understand What Type of Buyer You Are
- Buyers Who Buy a Business as a Livelihood
Many people want to buy a business with the expectation that it will provide a steady source of income. Typically, the business owners make a down payment of between 10% and 25% of the sale price, followed by seller financing for the remaining balance over several years.
After covering operational costs and loan payments, any remaining profit becomes the owner’s income. Essentially, you’re building an asset that generates ongoing income.
- Buyers Who Expand an Existing Business:
Established business owners sometimes acquire similar businesses for strategic growth. This approach allows them to:
- Increase market share and dominance: Expanding into new locations or acquiring a competitor can strengthen their position in the local market.
- Leverage existing knowledge: They already possess industry expertise, making it easier to value and operate the new business effectively.
- Create operational synergies: Combining resources and streamlining operations across businesses can lead to cost savings and improved efficiency.
- Investment for Passive Income and Growth:
Some business acquisitions are purely investment-driven. The goal is to find a well-established business with:
- Strong foundations: A solid business model, experienced management, and a loyal customer base are crucial for stability.
- Steady profits: Consistent profitability provides a reliable stream of passive income for the owner.
- Growth potential: An ideal business investment has the potential to increase in value over time, similar to real estate. This appreciation allows for a profitable sale at a later date.
Carefully consider your strengths, risk tolerance, and desired level of involvement to determine what kind of buyer you are and what success rate you can achieve through it.
Understand Ways to Become a Business Owner
There are mainly three ways through which you can acquire a business and become its owner. Starting a business from scratch, buying a franchise, and buying an existing business are the three ways; however, since we are talking about buying a business, we’ll discuss the latter two.
A lot of business owners get started in the business by buying a franchise. Some people easily handle the franchise, while others find the experience frustrating, disappointing, and even financially disheartening. Most people stay away from the franchise route because it is overpriced based on all the costs and fees, yet buying a franchise provides benefits as well.
Here are the pros and cons of owning a franchise.
Pros:
- Making the best use of name recognition. A well-run franchise uses its own money plus the advertising fees from franchises.
- Getting a training and operations manual from the franchisor, thereby laying out a precise plan for doing business.
- Available credit as a franchisor lets you pay the bulk of start-up costs over years.
- Territorial protection, as you might have exclusive rights to a franchised business within a defined geographical area.
Cons:
- Not all franchises are good to own.
- Relatively high cost
- Very little flexibility
- Long-term contracts
- It’s hard to exit the business if you are no longer interested.
- Buying an Existing Business
A lot of budding business owners go on this path, along with the help of Ontario Commercial Group’s business brokerage services. However, buying a business has its pros and cons, which are as follows:
Pros:
- You get a solid base to start
- An already established customer base
- Immediate cash flow
- Seller financing
- An existing location that’s protected by a favourable lease for several years.
- Expert assistance from brokers
- Collaborates with the supplier and vendor
- Reduced risk of business failure
Cons:
- Lack of obligation as you are owing someone elated
- Relatively high cost owing to goodwill
- Possibility of hidden problems
Business Analysis Before Buying
- Identify Businesses for Sale: Business brokers aid you in identifying how to find businesses that match your criteria.
- Financial Analysis: Reviewing the business’s financial statements to understand its profitability, debt levels, and overall financial health is a crucial step before buying a business. A helping hand from professionals such as business brokers, a team of lawyers, and accountants can help you tackle this part.
- Competitive Landscape: Analyze the competition in the target market. What are the strengths and weaknesses of your potential competitors? How can you compete with them with the business you are thinking of buying? And what are the ways to survive in the market?
Due Diligence: Ensuring a Wise Decision
- Consult with professionals: Hire a team of professionals that consists of an Ontario Business Broker professional, a lawyer, and an accountant to thoroughly examine the business’s legal and financial standing.
- Review Contracts and Leases: Carefully understand the terms of any existing contracts, leases, or franchise agreements.
- Talk to employees and customers: Get insights from the people who know the business best. Remember, employees and customers are the people who can make or break your business.
Conclusion
Buying the right business involves thorough research, clear goal-setting, and leveraging the expertise of a business broker. Understanding your buyer type, evaluating financials, and conducting comprehensive due diligence are crucial steps to ensuring a successful acquisition and long-term business success.
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Two Similar Companies ~ Big Difference in Value
Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?
One can look at the usual checklist for the answer, such as:
- The Market
- Management/Employees
- Uniqueness/Proprietary
- Systems/Controls
- Revenue Size
- Profitability
- Regional/Global Distribution
- Capital Equipment Requirements
- Intangibles (brand/patents/etc.)
- Growth Rate
There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:
- Are the company’s projections believable?
- Where is the growth coming from?
- What services/products are creating the growth?
- Where are the customers coming from to support the projected growth – and why?
- Are there long-term contracts in place?
- How reliable are the contracts/orders?
The difference in value usually lies somewhere in the company’s growth rate!
© Copyright 2015 Business Brokerage Press, Inc.
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Read MoreWhat Do Buyers Really Want to Know?
Before answering the question, it makes sense to first ask why people want to be in business for themselves. What are their motives? There have been many surveys addressing this question. The words may be different, but the idea behind them and the order in which they are listed are almost always the same.
- Want to do their own thing; to control their own destiny, so to speak.
- Do not want to work for anyone else.
- Want to make better use of their skills and abilities.
- Want to make money.
These surveys indicate that by far the biggest reason people want to be in business for themselves is to be their own boss. The first three reasons listed revolve around this theme. Some may be frustrated in their current job or position. Others may not like their current boss or employer, while still others feel that their abilities are not being used properly or sufficiently.
The important item to note is that money is reason number four. Although making money is certainly important and necessary, it is not the primary issue. Once a person decides to go into business for himself or herself, he or she has to explore the options. Starting a business is certainly one option, but it is an option fraught with risk. Buying an existing business is the method most people prefer. Purchasing a known entity reduces the risks substantially.
There are some key questions buyers want, or should want, answers to, once the decision to purchase an existing business has been made. Below are the primary ones; although a prospective buyer may not want answers to all of them, the seller should be prepared to respond to each one.
- How much is the down payment? Most buyers are limited in the amount of cash they have for a down payment on a business. After all, if cash were not an issue, they probably wouldn’t be looking to purchase a business in the first place.
- Will the seller finance the sale of the business? It can be difficult to finance the sale of a business; therefore, if the seller isn’t willing, he or she must find a buyer who is prepared to pay all cash. This is very difficult to do.
- Why is the seller selling? This is a very important question. Buyers want assurance that the reason is legitimate and not because of the business itself.
- Will the owner stay and train or work with a new owner? Many people buy a franchise because of the assistance offered. A seller who is willing, at no cost, to stay and to help with the transition is a big plus.
- How much income can a new owner expect? This may not be the main criterion, but it is obviously an important issue. A new owner has to be able to pay the bills – both business-wise and personally. And just as important as the income is the seller’s ability to substantiate it with financial statements or tax returns.
- What makes the business different, unique or special? Most buyers want to take pride in the business they purchase.
- How can the business grow? New owners are full of enthusiasm and want to increase the business. Some buyers are willing to buy a business that is currently only marginal if they feel there is a real opportunity for growth.
- What doesn’t the buyer know? Buyers, and sellers too, don’t like surprises. They want to know the good – and the bad – out front. Buyers understand, or should understand, that there is no such thing as a perfect business.
Years ago, it could be said that prospective buyers of businesses had only four questions:
- Where is the business?
- How much is it?
- How much can I make?
- Why is it for sale?
In addition to asking basic questions, today’s buyer wants to know much more before investing in his or her own business. Sellers have to able to answer not only the four basic questions, but also be able to address the wider range of questions outlined above.
Despite all of the questions and answers, what most buyers really want is an opportunity to achieve the Great American Dream – owning one’s own business!
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