Identifying a Great Deal When Buying a Business

We talk a lot about how to create and/or buy a “sellable” business. Most focus on value, which is one aspect, however, “valuable” businesses are not always “sellable” or “buyable”. To date we’ve focused on our 3 pillars. In a nutshell, we explain that sellable/buyable businesses have great timing and align with social/economic/tech trends, sellable businesses are self-sufficient – meaning they aren’t dependent on a particular stakeholder and sellable businesses have strong, growing and recurring revenue. However, as more and more of our users leverage our Full Serve solution, we’ve had a front row seat to see attributes that make a great deal for buyers.

Let’s lay it out.

You want to find a business with as many of these attributes as possible: 

1. Clean books. Clean books. Clean books. Easy to understand P&L and Tax Returns. No funny business.

2. Adjusted Earnings (SDE or EBITDA) between $200-800K is the sweet spot for maximizing ROI on both your investment and time. Smaller can be better, but too time consuming. Bigger can be less time consuming but you have to pay higher multiples.

3. Self-sufficient – the business isn’t dependent on a particular stakeholder, whether it’s one employees, customer or vendor. Example: your biggest customer should represent under 10% of revenue.

4. Strong recurring revenue history - In business for at least 3 years. Longer the better. Another metric to uncover is RPE (revenue per employee). Most companies uncover COCA (cost of customer acquisition) and ARPU (annual revenue per user/customer), however, RPE is one of the most underestimated metrics. When comparing companies side by side in similar industries, you want the one with the highest RHE. Employees are hard to get nowadays- get the most from them.

5. At least 5 employees. People act like the less employees, the better... but it's just not true. You're trying to buy a business, not a high-paying J-O-B, and you want good people in sufficient quantity, coupled with strong technology, processes and principles so the business can run without you.

6. Geographically located somewhere with a growing population. Rising tide lifts all boats.

7. Good reviews/reputation. Really hard to turn around a bad reputation.

8. Timing/S.E.T – you want a business with trends on the upswing. Easier to accelerate when heading the right direction already. Auditing S.E.T (social, economic and tech trends) is essential.

9. You have something in your background/experience that this company will benefit from. Could be connections, knowledge, technology, sales and marketing experience, financial sophistication, etc... but what's between your ears gives this company something it's missing.

10. Strong margins. Aim to find a business with slightly higher than normal margins in the industry when possible. Assuming you can immediately fix low margins to industry standard is an extremely dangerous assumption. You'd rather grow revenue with already good margins.

11. Rich owner, strong cash position on balance sheet, low debt. Success leaves clues.

12. Most revenue is recurring or reoccurring:

- Recurring = an automatic monthly, quarterly, or annual payment from customer. (ex. quarterly pest control agreement)

- Reoccurring = same customers come back over and over, though not automatic. (ex. periodic restaurant vent hood cleaning)

13. No family members of seller working in key positions. Exceptions to the rule of course, but this bites you more often than not.

14. Small market share. Hard to grow when you've already got 90% of your potential customers.

15. Industry tailwinds. People don't put enough emphasis on this. Pick a sector likely to grow more than inflation over the next 10 years and your life and growth will be 10X easier than operating in a shrinking sector.

16. Competitive moat, barriers to entry. These can take many forms, but I like stuff under the radar without stiff pricing competition that are hard to easily replicate.

17. You can't imagine a gen Z kid creating an app within the next 10 years that puts you out of business.

18. Government would consider you essential in times of Pandemic.

19. Fragmented industry with lots of Boomer owners you could potentially absorb or buyout as they retire in the next 10 years.

20. Talent can be easily recruited to do the work needed to grow as long as you pay well. It's hard everywhere but make sure it's not nearly impossible in your industry and geography if you want to grow.

21. Recession resistant: think "necessity". You want something that does just as good or even better in downturns when buying in hot markets.

22. Low Capex requirements. Can scale easily by reinvesting its own profits without having to constantly take on more debt to grow.

23. Not fully modernized. Look for paper file cabinets, no e-commerce, mediocre websites, etc... as those can mean big opportunities for growth and cost savings / efficiency gains.

24. Owner and employees seem generally happy. Vibe check is important. Walk away if everything is perfect on paper but everyone looks miserable, thought twice.

25. Improves the lives of your customers. Seriously. What does it profit a man if he gains the world but loses his soul? Pick something that you can be proud of and you'll execute with so much more passion and self-esteem. It's not all about money, it's about showing up with a full heart.

If you can get most of these attributes and buy it for 2-4X earnings... it's the deal of a lifetime and you need to jump on it.

Search now: https://buyandsellabusiness.com/businesses-for-sale

Opinions expressed here by contributors are their own.

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Source: Twitter.com | Inspired by Clint Fiore | BuyAndSellABusiness.com