The Best Types of Business to Buy

You might think that the best types of business to buy are the ones everyone is clamouring for, the hot and trendy businesses, the beautiful ones. I think that’s misguided and you need to change your mindset.

You might think that the best types of business to buy are the ones everyone is clamouring for, the hot and trendy businesses, the beautiful ones. I think that’s misguided and you need to change your mindset.

I believe – in fact, I know for certain – that there’s a great deal of money to be made by buying those businesses that no one else wants.

What is a business no one else wants?

This is a business that might not be exciting – it’s perhaps even an ugly business. It’s the sort of business the big players in your sector wouldn’t give a second glance, as it’s too small for them.

However, if you adopt a buy and build strategy you can buy small businesses like this – probably for less, as no one else wants them and that diminishes the price – then merge them into something desirable that you can sell for a lot of money.

A word about money

Money’s important, we all need it to live, but it’s also important to acknowledge this isn’t solely about the money – it’s the personal challenge, the sense of achievement, the fun … because doing this is better than sitting behind a desk running the same business day in, day out.

Your business acquisition strategy

When it comes to your business acquisition strategy, if possible, buy a business in a sector you already understand. This should be obvious – the business will make sense to you, it reduces your learning curve, you only have to learn how to buy the business, not how it operates. If you buy something you don’t understand, your learning curve will be much steeper.

What if you don’t understand anything? Simple – you find someone who does! You don’t have to give them equity, ownership or even a salary. You might pay them at some point, but not necessarily now.

You might be wondering, do people really do that? Help out just because they can? Yes! Up until a few years ago I didn’t know anything about the children’s day nursery sector and so I went on LinkedIn and asked, and I got people offering to give me information and assistance.

However, option number one, buying a business in a sector you already understand, clearly makes a lot of sense.

When it comes to business acquisitions remember, you are not looking for a distressed business, you are looking for a distressed owner.

Yes, you can make money from turning a distressed business around and turning a loss into a profit, but why not buy a profitable business from someone who just wants to get out?

Case study

Nick Manuel bought a balloon-printing business with £500,000 turnover, operating online. The business was already making £100,000 profit, but with cost savings – it fits comfortably alongside his existing businesses – it will now make £200,000.

The business owner had agreed to lease her warehouse to a new tenant in two weeks’ time, so she had to clear everything out by then. She had been going to close the business, but sold it instead – in just two weeks!

Nick is featured in our next newsletter, and you can read all about the deal in his own words. But a key element of that deal is that the owner was highly motivated to sell, and that’s exactly what you want.

You want an owner who is motivated to sell

People are motivated to sell for all sorts of reasons, but the main ones are retirement, stress and illness, plans to move abroad, family issues, and coronavirus.

I can’t stress how important it is to have a motivated seller.

Don’t procrastinate!

If you have decided to buy a business as a first step in a buy and build strategy, don’t keep putting things off. Yes, having a plan is a good thing, but if the planning becomes the entirety of your effort you’ll never get anywhere. Get off the starting blocks!

Your first business

There are no hard and fast rules in business acquisitions. You can start with a very small business or you can start, as one of my Mastermind clients did recently, with a first acquisition costing £1.7 million with a turnover of £7 million. Any limitation is often imposed by your mindset.

But still, as a broad guide, the first business you buy will generally be modest in size, generating less than £1 million in annual revenue. Get through the learning curve with a more modest business, then when you’ve built confidence and knowledge, you can go bigger.

Having said that, you want it to be making solid profits. They don’t have to be life-changing, £50,000 or £100,000 a year is fine, but you don’t want a business that’s losing money as it would have to be propped up in some way.

As we’ve just been discussing, it should ideally be offered by a highly motivated seller. There’s no point trying to buy a business from someone who isn’t motivated to sell.

Remember; your first business is your platform investment for a buy and build strategy.

The STAR Deal

Whatever the business you buy, your best possible deal is a STAR deal. With this, we’re looking for five different elements: motivation; valuation; potential; structure; and simplicity. Let’s take a closer look.

Motivation

You need a seller who is motivated; if they aren’t, you are at a disadvantage. If they say, ‘I’m not really interested in selling my business, make me an offer,’ that puts you on the back foot.

Bear in mind they may be bluffing, so call their bluff. Say the business might not be for you, tell them to come back to you when they’re sure about selling. They might stop the game-playing and back down immediately.

What you’re looking for is someone who wants to sell their business yesterday!

Valuation

You need a seller with a sensible valuation figure for their business.

If they’ve spoken to a business broker, the broker might have put a ridiculous figure in their head and the chances are they are never going to get what they’re asking.

You should never buy a business for an inflated amount of money. If you overpay when you buy the business, you don’t make money – or at best, not as much money as you should – when you sell it.

Potential

Ugly businesses that aren’t perfect are great businesses to buy. Look for a business with potential, maybe one that’s seen better days but could be great with a bit of TLC.

Incidentally, the best way to make a business great is often to remove the original owner, as they are probably the one who’s dragged it down! The quicker you can move them on and put your own person in (remember, this isn’t a job for you) the better.

Structure

You want a deal structure that works for you. In my case, if they want all the money up front, unless it’s a small amount, then it’s a no go. I’d rather walk away and find another deal.

The walk away is your power, but you need deal flow to be able to do that. Later in this issue you can read part one of a three-part article on ensuring good deal flow.

Simplicity

Make sure transfer of ownership will be straightforward. If there are, for example, five shareholders – one is abroad, they haven’t spoken to another for a year, that kind of thing – walk away.

You want a situation where you’re dealing with one person, two people at most, three at a stretch. Keep it nice and easy.

Last words on the STAR deal

If all five boxes – motivation, valuation, potential, structure, simplicity – aren’t ticked you’re just making life difficult for yourself. Move on and find a deal that ticks all the boxes!

When you do buy a business, get out of the day-to-day running as soon as possible. In this situation, you are the friction, the restriction. Buy it, make it bigger, put in a management team. Then you can go on holiday and you’ll only need to check in maybe once a week – they’ll run it for you.

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