June 4, 2020  
 
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Businesses to Buy

 

Finding the Right Business to Buy

Written by James Garvin for Gaebler Ventures

Buying a business can be a great way to pursue your entrepreneurial passions without having to start at ground zero. Trying to find the right business to buy is often very challenging, but with the right best practices you can start to increase your probability of finding the perfect business to buy.

For those wanting to buy a business, conducting a strategic and methodical search will help you identify and find the right business to acquire.

The first step to take in looking to acquire a business is to define the parameters of the business that you would like to by. Try to narrow it down to a specific industry, a specific size and do some research on businesses that meet your parameters. Typically acquirers have some operational experience in a given industry and look to acquire businesses in that industry. Others are simply opportunistic and looking to acquire a firm that is heavily undervalued. Whatever your motivation, you'll need a focused approach to conduct an effective search.

Before you start a search for a business, connect with other business owners who have acquired businesses. They can provide some invaluable insight and advice regarding realistic expectations and lessons learned. There is no sense in repeating errors that have been made when acquiring a business if you can learn about them before hand.

Knowing how you will finance your acquisition will also determine what kind of business you acquire. If you have external investors, they will likely require that you purchase a business with certain profit multiples attached to it (e.g. 20% EBITDA margin) and that is an industry poised for growth.

Seller financing is becoming more popular as it becomes more difficult to get small business loans from banks and creditors. Seller financing can also demonstrate to the buyer that the seller has confidence in the future performance of the company.

The type of business you buy will also dictate the type of financing that you can use. If you are buying a strong cash flow positive business, you may be able to finance the purchase with up to 80% debt. However, if you're buying a turn-around business that is currently losing cash, you'll probably need to pay 100% cash, unless you can obtain favorable financing terms with the seller or a creditor that delays payment for a few years.

Expect the search to take several months at best to a couple of years at worst. Often times the perfect business to buy is not even for sale, rather it is found through a combination of networking and soliciting businesses to determine their willingness to sell. The important thing to do is to get as many business opportunities in front of you. Some professional search firms hire undergraduate and graduate business majors to help them search and find potential companies. Others also make good connections with bankers who are often dealing first hand with business owners.

There are a few websites out there that list small businesses for sale such as BizBuySell.com. The majority of these businesses tend to be restaurants and other franchise-owned operations. While searching through sites such as BizBuySell may spark some ideas in terms of the type of business you want to by, they may do little to produce the perfect business that you should buy. A true search should involve a very targeted approach by soliciting small business owners for businesses that you think would be an attractive opportunity and developing a disciplined approach of scanning through hundreds of possible opportunities before settling on the perfect one.

James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.

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