Deciding to purchase an existing business is a significant process, whether you are a first time buyer or a seasoned investor. When starting this process one of the first things you need to ask is…What type of business should you buy?
The answer to this is entirely individual and depends on your lifestyle, finances, previous experience, etc. You need to ultimately determine why you are looking to buy a business in the first place. Maybe you are looking to expand your investment portfolio or searching for strategic expansion of your current company. For some, they choose an industry based off what they are passionate about or have prior experience in. Other investors may be looking based on location. Whatever the reason, I hope to provide some helpful information in this article to make your decision process a little easier.
3 Tips To Determine What Type Of Business To Buy
There are 30.2 million small businesses in the United States, making up a staggering 99.9% of all active businesses. The opportunities for you as an investor are endless. Over the next 20 years it is only expected to get better as baby boomer owners look to retire and sell their companies. However, sometimes too many options can lead to confusion and delayed action. So how do you narrow down your options to determine what type of business to buy? Consider the factors below to help you make this big decision.
1. What Do You Know?
Your previous experience will have prepared you for what you will be required to do in this new endeavor. Taking over an existing company is a great deal of work. So, it is important to both you and the business that you have some relevant experience that will translate over. How much experience and exactly what kind is entirely up to you and your comfort level. Knowing all the details about a given industry and market can be a huge help in this process.
But what if you don’t want to operate in that space? Maybe you want to pursue a passion or take advantage of market trends instead of doing what you’ve always done. What you absolutely have to do is objectively assess your specific strengths and weaknesses to determine what areas of business you are most suited for.
Finding Your Strengths Is Key
When moving into the world of buying and investing in businesses one of the most important things you can do to prepare yourself is to self asses. Understand who you are as a business person, and more importantly understand who you are not. By knowing your greatest business skill, whether that’s sales, logistics, operations, marketing, etc, you can then narrow down the opportunities for you in the market. Now when you are analyzing prospective businesses and doing your due diligence you need to determine what is primarily contributing to that company’s top and bottom line. Whatever it is has to be your greatest skillset.
If what drives a business’s ability to grow and expand is a weakness of yours, then find a new business to buy. The average asking price of a sold business in 2019 was around $278,000. When you are investing that kind of money, you don’t want to be playing from behind. Look for businesses that your skillset can affect the most to maximize your return on investment.
2. Determine Your Financial Goal
There are a multitude of financial reasons someone would consider buying a business. On the smaller scale, an individual might be looking to take control of their financial future and explore their entrepreneurial goals. This can even include individuals looking for multiple streams of income or consistent revenue into retirement. Typically these individuals are not frequent investors and may be buying a business for the first time. On the other end of the spectrum are individuals making strategic investments and expanding their portfolio. This can include experienced investors or companies seeking to make a merger or acquisition. They are often looking to expand their net worth, operational territory, or market dominance.
No matter what end of the spectrum you may fall into, there can be offensive and defensive financial strategies to consider. An offensive strategy would mean that you are looking for high return and willing to take some risks. The type of businesses in this category may be reliant on the state of the economy, current market trends, or just be a generally higher risk investment. A defensive strategy would largely be considered a safer financial decision. This could include businesses with a consistent book of business that are not as heavily dependent on current economical conditions. Regardless of what you are looking for, it is important to understand the financial expectations you have in your investment and to choose businesses that validate that goal.
3. What Lifestyle Do You Want?
A lot went into getting you to the point in life where you can make the decision to buy a business. Years of hard work, focus, and financial planning have you in the position to invest. But before you jump into a deal, take some time to determine what lifestyle you want. You see each business has it’s own unique challenges and demands. So, before you spend a significant amount of time and money, consider how those demands are going to affect your lifestyle.
Things like time commitment, revenue potential, location, and competition all influence the lifestyle of an owner. Here at Cemo Business I have dealt with a variety of buyers all with different lifestyle goals. Some have been financially focused with less regard for how the acquired business will affect their lifestyle and others are basing their decision almost entirely on how an individual business model will fit into the life they want. For example, a middle aged first time investor that has saved for years to make this entrepreneurial jump and a retiree looking for a reliable stream of income near their retirement home in Clearwater, FL will probably have very few prospective listings in common.
It is impossible to ignore how big of a factor a person’s desired lifestyle plays into almost every decision they make. Where you are in life will determine what type of business you should buy.
So…What Type Of Business Should You Buy?
Answer: It Depends
After all of this information hopefully you can appreciate just how individual and personal this decision is. Ultimately the choice you make has to be aligned with you, your experience, your finances, and your lifestyle. To be honest, you could make a never ending list of tips and factors that go into the decision to purchase an existing business. If there is any constant it is that you absolutely must do your research. The more you know about yourself and a potential business the better prepaid you will be.