3 Tips for Choosing the Best Business to Buy
You’re going to be an entrepreneur! Imagine how excited you’ll feel on opening day as the proud new owner-operator of a profitable small business.
Sure, you could develop a business idea from scratch. But why risk costly start-up headaches? For better stability and predictability, you’ve decided a smoother path will be to buy an existing company with a proven business model, established cash flows, and people and facilities already in place.
Now imagine this: It’s three years later, you’ve poured tens of thousands of dollars into what looked like a winner—but it’s been a money-loser ever since. Or you hate the choice you made and dread walking into your shop every morning.
Choosing the best business to buy—whether it’s in Toronto, in the GTA or elsewhere in Ontario—is one of the most important personal and financial decisions you’ll ever make. The wrong selection could cost you your life savings … or make you downright miserable.
Dreaming of ownership? Follow these three tips to stop your dream from descending into a nightmare.
1. Assess your personality and skills
Let’s face it—business ownership is deeply personal. You’ll spend a lot of time in your new shop or facility. Your identity will revolve around it. What if you find yourself trapped in a new venture that’s misaligned with your personality, values, and strengths?
“I once helped someone looking to buy a manufacturing business,” said Vincent Côté, Broker and CEO at Transitions Business Brokers. “One of the businesses we looked at was run by a guy from another industry who had bought the business three years ago, but knew nothing about manufacturing. As a result, the company wasn’t doing well anymore, and the guy wanted out.” Though Côté added that you can succeed in an unfamiliar industry by hiring knowledgeable managers, this example shows what can happen if you buy a company without doing a deep dive first into who you are as a person and what you do best.
The Transitions Business Brokers Business Buyer's Brilliance program helps you successfully identify the best business to buy. The first step is to discover what kind of businesses fit well with your personal attributes.
Did You Know...
Many buyers "want" to buy a business, but very few actually will. The typical business for sale listing gets on the order of 100 buyers inquiring about it, and if the seller is lucky, only one will become the new owner.
2. Evaluate your target company
You’ve received information about a company for sale, and today’s the big day that you’ll be touring the facility and meeting the seller. How will you know whether this might be a good business to buy?
“Lots of people fantasize about being their own boss,” said Côté. “The reality is that running a small business is hard work—and much of it is tedious administrative work like paying bills, reconciling till receipts, and scheduling workers. That doesn’t mean you shouldn’t buy a business. But make sure you understand what you’re signing up for.” That means scrutinizing your choice before you prepare a purchase offer.
“Am I right for this business, and is it right for me? Can I afford this business, and can it afford to pay me? Is the asking price fair? Will it be viable in the future?” These are some of the questions you need to ask yourself during your examination.
When you go through our Business Buyer’s Brilliance program, we’ll walk you through a step-by-step example of how to evaluate a business using our exclusive 5-F framework.
Did You Know...
3. Do your due diligence to uncover any risks
Congratulations! Your offer has been accepted. Now due diligence begins, and you’ll get exclusive access to the business books and records.
Specifically, what do you need to review? Here are examples:
- The business plan, including information about products and services, competitors, the marketplace, and the business environment
- Financial statements (e.g., income statements, balance sheets, income tax filings, till receipts or point-of-sale reports, budgets)
- Information about inventory, equipment, technology, and facilities (e.g., inventory list, lease agreement)
- Operational documents (e.g., policy and procedures manual, quality manual and reports, work instructions, flowcharts, task lists)
- Legal, contract, insurance, and intellectual property documents
- The marketing strategy, the sales process, and customer information including customer concentration
- Human resources information including the level of owner dependence
Did your review uncover anything that contradicts your earlier assumptions? Worse, did the seller misrepresent the facts? If either of these is true, you have every right to adjust the deal’s price and terms downward … or even walk away completely.
“Is this the best business to buy?” you’ve been asking yourself from the moment you started looking at possible candidates. Due diligence may be the stage where you wisely answer no.
At Transitions Business Brokerage, we help you gain clarity on the best business to buy, offer you our exclusive 5-F framework so you know whether a particular business is right for you, and help you through the entire business buying process.
Start turning your business ownership dreams into reality! Get started on the road to business ownership today.