What’s a Good Business to Buy?

For aspiring entrepreneurs looking to acquire a business, one of the most common questions is:?What’s a good business to buy??The answer is not as straightforward as many would hope. There is no one-size-fits-all business that is perfect for everyone. A business that thrives under one owner might be a disaster for another. However, there are several key factors that can help determine whether a business is a good acquisition target for you.

1.?Profitability and Economic Sense

A good business to buy should be profitable and make good economic sense. This means evaluating whether the business has consistent revenues, a stable customer base, and a sustainable profit margin. The financial statements should be clear, robust, and easy to follow.

2.?Clean and Transparent Financial Records

The business's financials should be well-documented and easy to interpret. While many business owners utilize legal write-offs to minimize taxable income, there should be a clear record showing what expenses are personal adjustments versus essential business expenses. Common personal adjustments include items like:

• Owner’s salary adjustments: If the owner pays themselves $100,000, that figure should be factored into cash flow analysis.
• Non-essential expenses: Some owners may write off luxury vehicles, extravagant trips, or other personal expenses that do not directly impact business operations.
• Depreciation and amortization: These are non-cash expenses that can be added back when analyzing cash flow.

It’s crucial to work with someone experienced in business valuations and financial analysis to ensure a proper understanding of adjustments and add-backs.

3.?Understanding Financial Adjustments

Certain expenses might be included in a business’s profit and loss statement but could be adjusted when assessing its true cash flow. Here’s an example of a common adjustment:

• Example: Suppose the business owner spends?$12,000 per year?on meals.

Should that be added back to reflect an owner benefit?

• If this amount is primarily used for personal dinners with their spouse under the guise of business discussions, then it can likely be added back to cash flow.
• However, if the expenses are used for?client entertainment, staff rewards, or essential networking, they should remain as legitimate business expenses.

Understanding these financial nuances helps buyers gain clarity and confidence in the business’s profitability.

4.?Industry Fit and Personal Compatibility

The best business for you to buy should align with your experience, skills, and interests. Just because a business is profitable does not mean it will be a good fit. Ask yourself:

• Do I have the necessary skills or the willingness to learn?
• Am I passionate about the industry and the day-to-day operations?
• Can I see myself growing and improving the business?

A well-matched business not only increases your chances of success but also ensures long-term satisfaction.

You don't always necessarily have to have direct experience in the business. The world is full of entrepreneurs and individuals who have learned something new and become incredibly successful. Many of the banks providing SBA loans are going to challenge you on whether you have the skills to learn a particular profession, so you'll have to work around that. However, passion and a solid, dedicated interest in success are often more valuable than prior experience. In fact, you might be leaving a job where you have been proficient for years but feel burned out—perhaps as an attorney or accountant—ready to try something creative and innovative in the food or entertainment industry. Take an assessment of the skills you've developed and how they apply to this new field. Be aware that you will need to learn new things. Consider joining a relevant industry association, paying the current owner to stick around for training, or picking up books on how to run a specific type of business. Immerse yourself and get acquainted with the industry.

5.?Clear Growth Potential

A good business to buy should have room for growth. Look for signs of expansion opportunities, such as:

• An untapped customer base
• The ability to introduce new products or services
• Expansion into new markets
• Operational efficiencies that could improve profitability

Buying a stagnant business with no room for improvement might not be the best investment unless you have a clear strategy for revitalization.

6.?A Strong and Sustainable Customer Base

A business that relies too heavily on one or two major clients can be risky. Ensure that the revenue streams are diversified so that losing a single customer doesn’t cripple the business. Customer loyalty, repeat business, and strong market demand all contribute to a business’s sustainability.

7.?A Smooth Transition Plan

A great business acquisition comes with a well-thought-out transition plan. Ask:

• Will the seller provide training and support?
• Is the existing management team staying on board?
• Are supplier and customer relationships secure?

A business with clear operational procedures and a seller willing to offer guidance during the transition period will make ownership much easier.

Final Thoughts

The best business to buy is one that aligns with your skills, has strong financials, clear growth potential, and offers a smooth transition. Understanding the financials, making proper adjustments, and seeking professional guidance are crucial steps to ensuring a successful acquisition. The journey to business ownership is an exciting one, and buying an existing business can be one of the smartest ways to become a successful entrepreneur.