7 Steps to Acquiring a Small Business
1. Identify what you want.
The best opportunities are small companies earning between $1 million and $10 million a year in revenue. Look for simple business models with little investment competition, such as professional services like construction, engineering, and plumbing. But the best sector is the one that speaks to your interests and experience.
At the same time, you may not even need personal experience in the industry—because you may be able to work out a deal in which the business owner trains you. If you don’t want to manage the day-to-day operations yourself, you can hire an experienced professional or promote from within the company while the owner is still around to train them. You can usually find someone doing the same job for another business and incentivize them to leave their salary for equity in your company.
2. Find motivated sellers.
It’s crucial to find business owners who want to move on and are motivated to sell. Many baby boomers are ready to retire, while other sellers are bored and need a change.
Most businesses sell for a multiple of the profits. For example, one that’s earning $100,000 will sell for three times that amount. But if you find a motivated seller, you can often negotiate only to pay the equivalent of one year’s revenue (in this case, $100,000).
You can find these businesses the same way you would find clients — through social media marketing or networking, for instance. It’s simply about changing the conversation and putting yourself out there as an investor looking for opportunities.
3. Calculate this simple math.
Offer to sign a nondisclosure agreement, so the business owner is comfortable sharing their books with you. Confirm that there’s more money coming in than going out and that cash flow has remained consistent over the past three years. Then ensure there’s enough profit to cover the cost of financing.
In addition to profitability, consider whether the business has opportunities for improvement, particularly if it’s weak in an area where you excel. You can often double your profits just by improving marketing or operations, for example.
4. Connect with the business owner.
While demonstrating smart plans for the business is important, your pitch should be about more than that. For many owners, their business is their baby — which means they care about more than money. They want to know that you’ll look after the brand and reputation they’ve worked so hard to build. So they may be wary that you will lay off their long-time employees or damage meaningful relationships.
Focus on why you will be the best steward of what they have built by demonstrating that you’re trustworthy and will continue their legacy. How? Build rapport, ask questions, and speak directly to their concerns. Show that you care about them rather than talking about yourself the whole time. It’s even better if you can position yourself as a young, eager version of them.
5. Finance the deal, sometimes with little or no out-of-pocket costs.
Many financing options don’t require your own capital — or any at all. If the owner is motivated to move on, you can often buy a high-potential business for next to nothing. Some business owners will let you pay them back over time using the profits from the business. If they want to be paid up front, you can secure a loan from a financial institution that specializes in acquisitions. Banks can use the business profits as collateral; they’re less interested in your credit and mostly want to see that you have skin in the game.
You’d be surprised how much of the financing terms are negotiable, so brush up on your sales and persuasion skills. It’s common to pay no more than 30 percent of the purchase price at closing. If you can find experienced investors to loan you the money in exchange for equity, you can use the profits from the business to cover the interest payments.
There are other deal structures, but the point is this: Rather than acquiring debt to fund an unproven idea, it’s possible to buy an asset that has the cash flow to pay for itself.
6. Dive into due diligence.
After you agree on an offer, it’s time for due diligence. Consult with accountants and lawyers and negotiate a fee structure that’s contingent on closing the deal. That way, they’re not motivated to bill as many hours as possible.
Speak openly with key employees to understand how the business runs and ensure that they don’t plan to leave when the deal closes. Establish a solid succession plan with a manager who knows the industry inside and out. Clarify your role and theirs and identify key performance indicators (KPIs) for everyone.
7. Leverage the business owner through the transition.
Now you need to hold everyone accountable, with a clear process in place that you can execute. The business owner knows exactly how everyone and everything works, so lean on them throughout the transition. They’re typically motivated to help you succeed, but consider stipulating a handover period to ensure they stay long enough to pass on their knowledge.
Congratulations! You are the owner of an established, profitable business. Whether you stay involved in the day-to-day or step back and let others do that, you now have a valuable asset — and more personal freedom.