How to Find the Right Business to Buy

Have you ever found yourself saying, "I would love the freedom and the potential that comes with owning my own business, but I have no idea what type of business to buy"? This is a common refrain from many entrepreneurs, and rightfully so. Owning a business is about more than just following your passion. Loving what you do is one thing; loving what you do and making a living is entirely different. 

Before taking the plunge into business ownership, you owe it to yourself and your future to engage in preliminary due diligence, ask the right investment questions, and do a little bit of soul-searching to determine your primary purpose for buying a business and what strengths you can contribute to the process. DealStream has pulled from over 25 years of experience working with entrepreneurs and investors to help you get started on your path to business ownership.  

Determine Your Purpose and Strengths 

First, you need to define your purpose for buying a business and what strengths you're bringing to the table as an owner. It's a given that every business owner and buyer is concerned with profitability and success. Taking market trends and growth potential into account is a must. But thinking only of money-making potential can backfire when you're first deciding on the right business to buy. Recent studies have found that individuals with a sense of purpose and a clear understanding of their strengths and abilities earn a higher income, have a higher net worth, and double their career satisfaction while decreasing their mortality rate. Keep in mind that many of your answers to logistical questions about location, costs, product niche, and your level of involvement will align with your strengths and your purpose for owning a business.

"Purpose" is tied to questions gauging risk-taking or security mindsets. For example, are you interested in growing a small business, or do you want to take over a company well-established in its industry? Are you looking to purchase a business that offers a product or service that's new to the marketplace, or are you interested in buying a business that's been a competitor of yours? Are you excited by the idea of the start-up marketing involved with a niche industry, new technology, or idea, or do you feel more comfortable taking over a business in a known market with growth potential measurable against past trends?  

Alongside your purpose, you'll want to identify your unique strengths and how you can use them as an asset both in the buying process and as a new owner. Knowing your strengths will help you identify the business that will bring you financial success and personal satisfaction.

Some entrepreneurs thrive on interpersonal skills, leveraging their management ability and personal networks to grow their businesses. Others rely on their sense of creativity and expression, enabling them to inspire with outside-the-box thinking and inventive problem-solving. Still others will prefer to leverage their well-honed technical skills to advance industry-specific needs or work with software, design, and development. 

Entrepreneurs' character traits and passions are nearly unlimited, and taking time to identify those unique strengths can turn them into valuable assets that will increase emotional and financial satisfaction.

Once you've defined your purpose and determined your strengths, it's time to perform preliminary due diligence. Unlike formal due diligence, the specialized and detailed discovery process initiated after making an offer to buy, preliminary due diligence aims to decide if a business deserves further consideration or should be disqualified. During preliminary due diligence, you are investigating and evaluating businesses for profitability and fit based on your purpose, strengths, and the following criteria.

Choose Your Location

It's important to understand the impact of location on profit potential. When considering your business’s location, you should be concerned with immediate profitability impactors such as access to transportation and parking, proximity to other businesses in your industry, and availability of resources like suppliers or customers. Additionally, be sure to consider any local regulations that may affect your current or future operations and research the success rate of similar businesses in the area.

Personal preference and desire are also worth considering at this stage. How important is it to you that you stay in your local area? Are you willing to move for the right business? How far? You'll need to determine what kind of commute you can tolerate and how that fits into your business plan and your overall work/life balance. Remember, too, that relocation can be costly and may move you away from your current networks, business owners, and contacts. 

Knowing the local area is also essential for any business owner looking to make a successful purchase. If possible, visit the business early on. If you can't visit early in the process, be prepared to do so at some point later. While there, pay attention to surrounding communities, schools, universities, or other social institutions nearby that could play a role in marketing and future growth. Also be aware of the importance of corporate social responsibility and the impact the business has, or will have, on surrounding neighborhoods. Remember, in many cases, buying a business includes buying the brand identity. Make sure the brand story is one you want to be part of. 

Select an Industry

When buying a business for the first time, it's a good idea to look to an industry with which you are familiar and comfortable. Drawing on those unique strengths and skills you identified early in the process will increase your odds of growth and profitability. For example, franchises will often require someone to work in their stores or restaurants before becoming owners of a location. The reasons are simple: if you don't know the day-to-day processes of that business, how will you know when operations could be going better or if employees are following procedures? The same is true when buying a business of any type. 

Understanding the type and amount of specialized knowledge and skill needed to run a specific business is a large part of the preliminary due diligence phase. This is not to say that you can't learn another industry, especially one adjacent to an industry you know. But you need to understand the ins and outs of any industry prior to investment. That includes market trends, competition, primary customer base, and other factors related to the industry. 

Set Your Price

When evaluating what you can afford, determine whether you can come up with the capital you need on your own or require funding or other financing. Be sure to consider whether the property the business sits on is owned or leased and, if owned, whether that property is part of the sale.

Upfront costs of purchasing a business represent only a fraction of the overall cost considerations. Factors such as current or future insurance costs and maintenance or update costs of software programs, databases, equipment, or machinery are also essential considerations. You will also want to factor in any costs associated with supplier contracts or third parties. Some operational costs will be offset by the existing customer base and the potential to attract new customers. You must research those potential cost offsets and prepare yourself to continue any cost-saving or customer outreach programs after the purchase. Finally, preliminary due diligence includes understanding your competition within the industry and on a smaller local or community scale.  

Knowing how much you can spend on a business across all fronts will help ensure your success and provide you with knowledge about what kind of income it can generate.

Conducting the Search

When it comes to conducting a search for a business to purchase, there are many options available. You can use brokers, listing sites, and even online marketplaces. Which option you choose will have a lot to do with the industry you're buying into, your budget, and your strengths in networking, communication, and research. While some options will require a more hands-on approach throughout the process, all the options below are worth exploring. 

Business Listing Websites

Listing sites are the first places you should look. Listing sites are the easiest to navigate and the most productive. They allow you to search through hundreds of businesses currently on the market. Typically these websites, such as DealStream, have listings sorted by business type, size, and location. 

Some listing sites deal with specific businesses. For example, DealStream is good for finding small- to middle-market-sized companies. Other sites focus on restaurants or hospitality businesses. Some listing sites that are more general in nature might be challenging to filter through, so it’s a good idea to determine your preferred industry and location before you begin your search.

Hire a Business Broker to Search for You

Brokers are experienced professionals who can help you find the right business for sale and negotiate the best deal. Using a broker can be beneficial because they can access listings beyond those on public sites. Viewing such listings means you will be competing against few (if any) other buyers, which can translate to a lower price for you. 

An experienced business broker has the necessary connections and market valuation knowledge and can provide crucial advice on businesses best positioned for growth. Brokers are also usually the point-person for the negotiations and can sometimes even help you secure financing. 

However, hiring a broker can be complex for a buyer and requires ongoing monetary investment. The costs of a business broker depend on your location, the broker's reputation, and the services you're receiving. The buyer's broker typically receives payment by splitting the commission of a sale with the seller's broker. This arrangement means they technically work for the seller. If you want a business broker whose sole fiduciary duty is to you, it will cost you. Payment arrangements vary by broker or brokerage firm but usually, to secure a loyal business broker, a buyer will have to offer payment in the form of a monthly fee, a general retainer fee, or (and possibly in addition to) an additional percentage of the transaction value — on average, about $5,000 per month (with a minimum monthly contract) and 5-8% extra commission from the buyer. 

Contact Business Brokers

Even if hiring a business broker is outside of your budget, you can still visit the websites of brokerage firms to find a public list of available businesses. However, this method requires a bit more legwork and persistence from you. It requires that you know how and are willing to handle other purchase details including valuation, negotiation, due diligence, and other processes. If you choose this route, you can also call business brokers in your area, tell them what you're looking for and ask to receive a list of current sales and be notified when a new business comes on the market. Many brokers have "pocket listings," or businesses that aren't officially for sale or listed to the public but are known to the broker. 

Advertise

Another option is to create a "business wanted" or investor availability ad that describes the type of business you want, preferred location, and price range. You can offer a finder's fee for introductions when listing such ads in a local paper. 

An even better method is to use online listing sites such as DealStream. Other online listing sites are available, but Dealstream has a worldwide reach and uses proprietary software to match potential buyers and sellers using the specific criteria provided by you when creating your listing. By taking advantage of these features and more, you can increase your visibility, get matched with results that are a better fit, and do it all in less time. 

Cold-Call Business Owners

While this may sound intimidating, it can be easier than you think. There are numerous videos illustrating cold-calling techniques as well as sites with cold-call script examples. Take advantage of our technologically connected world to first research businesses of interest. The biggest mistake you can make when cold-calling is being unsure of whom you're calling, what makes the company valuable to you, and what communication strategy will work best in each situation. Often, owners from the Silent Generation or Baby Boomers may be thinking about retirement and have been contemplating a sale for some time but have yet to take action. Sometimes, the owner has previously owned several businesses and may be looking for their next adventure.

These owners may be willing to meet with you informally before the business is officially for sale. Your call could spark their interest in selling!

Summary

Adopt a straightforward, efficient strategy for carrying out preliminary due diligence and focus on it. Taking the time to engage in asking thoughtful questions, performing careful research, and investing an appropriate amount of resources into searching for a business will be worth it in the long run. A shotgun approach to buying can waste time and quickly reduce resources you could otherwise use to grow your business. Instead, remain organized and use effective, low-cost methods with proven success rates, such as DealStream. If you focus relentlessly on finding a business that engages your strengths, has growth potential, and is within your budget, you'll soon find the business that is right for you and will yield financial and personal gains for years to come.

Nichole Brazelton, Contributing Editor