The views expressed by the business participants are their own.
In my previous article, I shared my thoughts on why equity trading (ETA) may be a more profitable, less risky route than building a startup.
We discussed the many opportunities to buy a business as the rising generation – who own many businesses across the US – look to retire and sell their companies to the next generation.
After deciding whether you will back your efforts with a search fund or self-financing, it is time to consider what kind of business you want to buy and how to acquire and acquire it.
Related: Want to Start a Business? Consider Buying One Instead – Here’s Why.
Where will you start?
The most important step is to decide which industry or market you are interested in or believe you can contribute the most expertise to.
If you use a search fund structure, your options may be limited by the limits set by your investors, as they will have thoughts about the best goals, especially in areas where they are most comfortable.
When you’re self-funding, the sky’s the limit: You can look within your comfort zone or take a risk on a company that will challenge you but have a big financial return.
Where can you look
You might be surprised to learn that finding these new business opportunities can be challenging unless you know where to look.
Here are a few ways you can search for the best results.
- Network: If you’re self-funded and focused on a certain industry or area, you can look to your network to see what might be out there. There’s no shame in opening up your LinkedIn rolodex and venting. Most people want to help, even if it’s as simple as passing on their knowledge.
- Service providers: Accountants are often the best source of off-market deals as they are most familiar with business owners’ financial plans. If you can find an attorney with experience in this area, they can be a great resource.
- Regional investment banks: One goal of this group of financial organizations is to help would-be entrepreneurs find businesses to buy. Initially, you can only access deals approved by others. Build relationships to see deals before others.
- Direct access: This is where your diligence skills should come into play. As it sounds, you identify and call businesses directly to inquire about their status and whether they might be interested in selling. It works but it’s time consuming, and you’re talking to people that other searchers might be looking at.
- Organizations/Groups: This method is best suited for industry-specific searches. You can contact the heads of organizations or network within the group.
Related: 63 Small Business Ideas to Start in 2024
What you should look for in finding a business
With so many opportunities out there, it’s hard to narrow down your search.
I recommend that you look for opportunities in traditional industries, such as manufacturing, industrial services or even IT businesses that serve traditional sectors. You’d be surprised how many profitable companies you’ll find here that people tend to forget about.
You’ll want to investigate industries that interest you and those with strong growth potential that you can unlock by bringing your expertise to the table. If you have previous experience, that is even better, as you will be better able to understand market trends and map out the competitive landscape.
Revealing important information
Unfortunately, your research becomes more difficult as you choose the company you are interested in.
You can get most of the high-level information you need by filing an NDA. This will usually include numbers for revenue, growth, profitability, headcount, and valuation range. The process includes contacting the business, introducing interest, signing the NDA, raising funds, determining the valuation and submitting the LOI, due diligence, drafting the acquisition documents and closing the deal.
Alternatively, you can set strict search parameters to find only businesses that meet your criteria. This will help you stay grounded throughout the search process and avoid wasting valuable time on business owners who are simply “testing the waters.”
Possible search parameters include specific EBITDA multiples or target ratios, growth rates, specific assets, debt levels or any other relevant data point.
Important person danger
If you are satisfied with the financial situation, it is time to investigate the performance of the business and assess the strength of the management team.
Key person risk is the most important threat to buying a small business. Most businesses cannot function without a CEO or someone on the executive team. Often, the CEO is a key relationship manager for suppliers, customers and others. So, when they leave, that important relationship can do the same.
You should look to identify this early so that you don’t waste precious time to find out that there is a very high risk for a significant other.
Related: 7 Steps to Starting a Small Business
Understanding the company and its people
This is also a great opportunity to see what aspects of their current operations work, what doesn’t and what new ideas you might be able to implement that can build on the foundation of the business.
Take the time to understand people and cultures. Do the company’s values and vision align with yours? Are they close? It’s not wise to buy a company you don’t believe in, even if the business is valuable.
Work closely with owners to understand the motivations and morals of their employees. Spending this time can give you a good sense of culture.
Funding potential deals
Once you’re satisfied that you have the best company lined up to buy, it’s time to find the right financing to bring it home.
If you’ve gone the search fund route, now is the time to talk to your investors about putting up some cash to get the deal done. In 90% of cases, it will be a combination of investor equity and a loan. If you’re considering a loan, talk to loan officers or bankers before getting one. Find out how they underwrite and what they look for so you know how much credit you can get if you find something within their parameters.
Like most entrepreneurs, you can invest your money in a purchase or borrow from family or friends to help you get started in the short term.
What’s next?
With your search complete and the purchase complete, it’s time to focus on the next phase of the ETA: the ownership transition and running the business as your own.
In my next article, I’ll explain the key elements of a smooth transition and how you can make sure it goes smoothly for you, the previous owner and the company. We will also explore how to run this new business the way you want while still respecting the legacy you inherited.
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